Synergistic promotion of climate action and sustainable utilization of water resources: a study on the impact of green finance development on urban water use efficiency

ABSTRACT With nearly 40% of the global population experiencing water stress and the climate crisis worsening, green finance, defined as an innovative mechanism that incorporates environmental benefits into the financial system, has become an important linkage between water management and climate action. Using panel data from 273 Chinese cities (2010–2021), this study measures water use efficiency (WUE) using the super-efficiency SBM model and constructs a multi-dimensional green finance (GF) index with the entropy method. Based on the measurement results, this study utilizes a two-way fixed-effects model to quantify the impact of GF development on WUE and employs mediation analysis to uncover the causal pathways involved. The empirical results show that: (1) The development of GF has a significantly positive impact on WUE; (2) GF significantly improves WUE through two mediating pathways: driving green technological innovation and promoting low-carbon transformation of industrial structure; (3) There is significant heterogeneity in the impact: the effect is stronger in the eastern region and Yangtze River basin. This study offers empirical evidence to inform the design of evidence-based green finance policies and to promote the integrated governance of climate, water, and finance.