The impact of geopolitical risks on green finance: the moderating role of institutional quality

Purpose This study examines the impact of geopolitical risk on three key green-finance instruments: green bonds, green credit and green investment. It also examines whether institutional quality can moderate that impact across 54 countries from 2014 to 2022. Design/methodology/approach We compile a panel of annual data on geopolitical risk, institutional-quality indices and green-finance indicators. Econometric identification relies on feasible generalised least squares, fully modified ordinary least squares and system-GMM estimators, supplemented by interaction models. Findings Geopolitical risks significantly hinder the development of green finance. However, our findings reveal that institutional quality plays a crucial moderating role, potentially transforming the negative impact of geopolitical risks into a positive one. The interaction analysis demonstrates that high institutional quality not only buffers against adverse geopolitical effects but also can enhance the resilience of green finance. Practical implications The study offers important policy implications, that strengthening institutional quality should be a priority in national strategies for sustainable finance development, particularly in contexts of heightened geopolitical uncertainty. Governments seeking to safeguard sustainable finance flows under rising geopolitical uncertainty should prioritise institutional reforms, such as stronger rule-of-law safeguards and predictable regulatory frameworks, as part of their national green finance strategies. Originality/value This study demonstrates that robust institutions can safeguard and even enhance green finance during times of heightened geopolitical risk. It provides a crucial cross-country analysis to assess the impact of green finance across various types.