The Impact of Sustainability Uncertainty on Financial Development

ABSTRACT Sustainability considerations are increasingly integrated into financial decision‐making, yet little is known about how uncertainty surrounding ESG standards, policies, and disclosure expectations constrains financial development. This study investigates the impact of sustainability‐related uncertainty on the structural characteristics of financial systems by utilizing the ESG‐Based Sustainability Uncertainty Index (ESGUI) across a panel of 25 countries from 2003 to 2021. Employing fixed‐effects and instrumental‐variable estimations, the analysis reveals a significant negative relationship between ESG uncertainty and financial development, with powerful adverse effects observed within financial institutions—especially in terms of depth, access, and efficiency—while financial markets appear largely unaffected. Moreover, the findings show that the negative impact of ESG uncertainty is amplified during periods of low GDP growth. These results underscore the importance of regulatory clarity and coherent sustainability frameworks in reducing uncertainty and supporting resilient financial systems. The study advances the ESG‐finance literature by identifying sustainability uncertainty as a key, yet understudied, constraint on financial development within the context of transitioning toward sustainable economies.