Sustainable finance as a catalyst for environmental innovation: insights from companies listed on the London Stock Exchange

Sustainable finance promotes environmentally responsible investments that support green technologies and eco-innovation. By channeling financial resources toward sustainable projects, it enhances firms’ capacity to develop innovative solutions for long-term environmental and economic resilience. However, the impact of sustainable finance on environmental innovation remains underexplored—a gap this study seeks to address. This study leveraged stakeholder theory to examine this gap. Using purposive sampling, the study identified 143 non-financial institutions with 17 years of data (2007–2023) from Refinitiv. The Generalized Method of Moments (GMM) estimation model was employed to address endogeneity in the analysis. The findings indicate that renewable energy investment, environmental expenditures, and green bond issuance have a positive and significant effect on environmental innovation. Conversely, emission-reduction policies were found to have a negative and significant impact. The study also revealed that firm size positively moderates the relationship between green bond issuance, environmental expenditures, and environmental innovation. Based on these findings, firms are encouraged to invest in renewable energy, green bonds, and environmental initiatives to enhance innovation. Additionally, leveraging firm size can support sustainability goals, ensure regulatory compliance, and create competitive advantages.