Green finance and the informal economy: Formality bias and the boundaries of financeability in the Global South

This paper examines how global green finance relates to informal economies across the Global South. ESG investment, green bonds, sustainability-linked lending, and other instruments depend on legal registration, auditable accounts, collateralizable assets, standardized disclosure, and verifiable environmental metrics. Drawing on panel data for 158 economies and structured document-based analyses of Turkey, Brazil, and Kenya, the paper develops the concept of formality bias. It argues that green finance does not merely overlook informal activity; through requirements of legibility and verification, it constitutes the boundary between financeable and non-financeable economic life. Larger informal economies are associated with lower Green Finance Implementation Reach Index scores, controlling for income, institutional quality, financial development, and trade openness. The country analyses trace three mechanisms behind this pattern: measurement invisibility, regulatory bypass, and financial exclusion. The paper concludes by proposing community-based, state-supported, and hybrid arrangements that can support environmental transitions without subordinating informal livelihoods to investor-facing metrics.