What drives green finance development? Evidence from provincial-level data in Indonesia

Abstract In recent years, developing countries have increasingly initiated green finance practices to promote sustainable growth. Indonesia is one of countries committed to this transition, although its implementation remains unevenly distributed across regions. This paper investigates the spatial variation of green finance development across 34 provinces in Indonesia using Dynamic Spatial Durbin model and its comparison with other spatial models specifications. By exploiting a novel provincial dataset spanning from 2018 to 2022, we evaluate the influencing factors and spatial externalities which drive green finance iniatives in Indonesia. In particular, we also examine the role of spatial spills-over to green finance development. Using Green Finance Index calculated from 3 vital dimensions (economics, finance, and environment), our empirical analysis highlights three principal findings. First , we identify negative spatial autocorrelation in green finance development, suggesting that provinces with high green finance performance do not generate positive spillover effects on neighbouring provinces. This spatial dispersion reveals persistent low–high spatial outliers, particularly in Kepulauan Bangka Belitung, Yogyakarta, Kalimantan Utara, and Banten during post COVID-19 period. Second , optimisation of industrial structure, environmental protection, and degree of financial development demonstrate significant effects on green finance development in the given provinces. Third , in the short-run, only indirect effect of optimisation of industrial structure influences green finance dynamics in the neighbouring provinces. From a policy perspective, our findings alert policy makers to re-think the possibility of augmenting green-industrial and technological policies with region-specific financial management.