Environmental Sustainability and Climate Finance: Revisiting Ecological Modernization Theory in Context of Asian Economies

ABSTRACT Climate finance acts as an institutional enabler that directly promotes environmental sustainability. This nexus may get amplified with the adoption of eco‐friendly modern technologies. The present research aims to study the efficacy of climate finance towards environmental sustainability and to investigate the mediating role of renewable energy consumption in the functioning of climate finance in the Asian context. With the theoretical background of Environmental Kuznets Curve (EKC), the mediation model approach is employed. The use of a modernizing tool along with the growth and environmental factors allows the present research to revisit Ecological Modernization Theory (EMT). Panel data of 19 Asian countries from 2010 to 2021 are considered. Dynamic Generalized Method of Moments is used as the primary model followed by Fully Modified Ordinary Least Squares as a robustness check. The results revealed that both adaptation and mitigation finance directly and indirectly reduce ecological footprint by augmenting emission reduction sources. Renewable energy, being a modernizing tool, acts as a significant mediator to channelize the role of climate finance targeting sustainable development goals. The study confirmed an inverted U‐shaped EKC reflecting that initial growth increases environmental problems, but over time, financial investments, technological innovations, etc., lead to sustainable growth, collectively aligning with EMT. The novelty of this study lies in the simultaneous applicability of EKC and EMT that ensures the co‐existence of modernization and sustainable economic growth. The research offers valuable insights in executing environmental policies focusing on the efficient distribution of climate finance. This kind of pioneering work for Asian economies is a significant value addition in the existing literature.