Can Innovation and Institutional Quality Unlock Green Finance Potential? Lessons From the <scp>OECD</scp> 'S Path to Sustainable Development

ABSTRACT The sustainable development goals (SDGs) cannot be achieved in high‐income economies solely provided access to capital, but the fabrication needs to be spread among financial flows, technological advancement, and the quality of institutions. This article will explore the impact of the green finance, represented by the green bonds and environmental protection spending, on sustainable development in the 29 OECD countries during the period between 2015 and 2022, as well as the mediating effect of the artificial intelligence (AI) and renewable energy capacity (RECAP). Based on quarterly panel data and a dynamic econometric model that encompasses both cross‐sectional dependence tests and slope heterogeneity as well as System GMM estimates, we get the results that green finance in and of itself has weak or adverse short‐run impacts on sustainability only. But placed within favorable institutional and innovation environments, it has a better effect. In particular, the green bonds are linked with a higher capacity of renewable energy, whereas the environmental spending is observed to crowd out AI investment in the short‐term. Openness of trade and government spending are always sustainable to development, and rule of law exhibits transitional costs, indicating that initially the reform of the rules might be counterproductive to the advance. These results promote SDGs 7, 9, 13, and 16 because they demonstrate that financial mechanisms can be effective at most when these mechanisms are supported by the effective governance and capacity to innovate. These are the performance based financial transactions, AI ready infrastructure and investment in long term renewable energy that we suggest the policymakers concentrate to better tie the connection between green finance initiatives and the SDG development in developed economies.