Towards net zero: Implications of environmental regulations on green finance

• We examine the role of environmental regulation and policies (regulatory mix) on green bonds in global settings. • Regulatory mix significantly promotes green bonds both in the short and long run. • A more pronounced role is found in countries with lower energy security and higher carbon intensity. • Developed capital markets and net savings for carbon damage are also important drivers. • The regulatory mix significantly promotes green bonds' longevity and reduces investors'risk. The 2024 IPCC (Intergovernmental Panel on Climate Change) report highlights that financing is a major concern in achieving the net zero goal. This paper studies the impact of environmental regulations and policies adopted by countries in promoting green finance. Using a large sample of 42 countries, we show that environmental regulations and green finance policies significantly boost the size and issuance of green finance instruments both by corporate and government issuers. Moreover, these regulations and policies enhance the longevity and attractiveness of green bonds issued by various economic agents, both in the short and long run. The effect of environmental regulations and policies on green finance is particularly pronounced in countries with lower geopolitical risk, low energy security, and higher energy needs per dollar of GDP. Our results remain robust under the conditions of short-run heterogeneity, long-run homogeneity, and cross-sectional dependence in the sample.