The impact of green growth on financial stability
| DOI | https://doi.org/10.1108/JFRC-01-2021-0006 |
| Published date | 12 July 2021 |
| Date | 12 July 2021 |
| Pages | 533-560 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Imran Abbas Jadoon,Raheel Mumtaz,Jibran Sheikh,Usman Ayub,Mohammad Tahir |
The impact of green growth on
financial stability
Imran Abbas Jadoon
Department of Management Sciences, COMSATS University Islamabad,
Islamabad Campus, Pakistan
Raheel Mumtaz
Department of Management Science, Faculty of Economics, College of Commerce,
Government College University Faisalabad, Faisalabad, Pakistan, and
Jibran Sheikh,Usman Ayub and Mohammad Tahir
Department of Management Sciences, COMSATS University Islamabad,
Islamabad Campus, Pakistan
Abstract
Purpose –The international institutions, policymakers and governments are promoting green growth as a pol icy
objective for global financial stability (FS) without sound empirical investigation. Therefore, the purpose of this
study is to investigate whetherthe green economy would be successful in achieving its main objective i.e. stabilizing
the world financial system because the investment stakes are too high for this green transition.
Design/methodology/approach –The study used the two-stepsystem generalized method of moments
(GMM) methodology on panel dataof 90 countries for 6 years from 2010 to 2015 to investigatethe impact of
green growtheconomy on FS.
Findings –The results of the current studyrevealed that overall green growth enhanced FS in the country
for both the short and long run. However, the social inclusive dimension of green growth was irrelevant in
creatingFS.
Research limitations/implications –The results of the current study validate the growth-ledfinance
hypothesis and encourage the policymakers to strengthen the policy initiative for green growth. Because
green growth mitigateseconomic and environmental risk to create a stable financialenvironment. However,
social inclusivenessneeds to be explored through alternateparadigm in relevance to FS.
Originality/value –As per the author’s knowledge, it is a pioneer study to empirically investigate the
impact of greengrowth on FS which would be useful in understanding the greengrowth and FS dynamics.
Keywords Financial stability, System GMM, Green growth, Growth led finance hypothesis
Paper type Research paper
Introduction
Financial stability (FS) is consideredas one of the main pillars of every economic system as
it enables the economic and social system to absorb shocks that are createdby inefficiencies
existing within the general economicsetup. FS allows the efficient dissemination of financial
resources within a society, by timely and efficient allocation of savings and creating
profitable investingopportunities (ECB, 2012). As the FS and financial intermediaries within
the economic setup are interdependent, they complement each other at every stage of
economic activities. If this relationis distorted then results mainly include financial crisis as
financial intermediariesare unable to allocate the funds to profitable projects.
The recent history of the financial system is embedded with concurrent financial and
economic crises. The most prominent financial collapse was the global financial crisis of
Green growth
on financial
stability
533
Received12 January 2021
Revised27 March 2021
27April 2021
Accepted4 May 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 5, 2021
pp. 533-560
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-01-2021-0006
The current issue and full text archive of this journal is available on Emerald Insight at:
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2007–2009 which was enacteddue to misallocation of investment in property, fossil fuel and
structured financial derivatives in the preceding decade. However, little emphasis was
placed on the allocation of investment for renewable energy, sustainable agriculture,
biodiversity and ecosystem(United Nations Environment Programme [UNEP],2011). In this
context, academician governments and international institutions coined the concept of “a
green economy”as a way forward to address the structural problemin the financial system
(Bina, 2013;Georgesonet al.,2017)and initiate a response to the financial crisis (Bina and La
Camera, 2011). A green economy can be viewed as the one whichreduces carbon emission,
improves resource efficiency and have social inclusiveness (United Nations Environment
Programme [UNEP], 2011), whereas green growth is a business strategy to achieve it.
Furthermore, greengrowth emphasizes on economic growth through the allocation of public
and private investment based on improved environmental and social business strategies
(United Nations EnvironmentProgramme [UNEP], 2011).
Acknowledging proposed benefits associated with the green economy but still, the path
to green transition is long and arduous.A huge investment is needed for this transition and
glimpses of this huge investment are provided by the Asian development bank (ADB) in
their report “Meeting Asia’s infrastructure needs.”ADB (2017) suggested thatUS$26.2tn or
US$1.5tn annually from 2016–2030 is needed to fill in the investment gap for green
transition only in 45 Asian economies. This amount surges to US$6.9tn annually if green
transition investment is considered globally (OECD, 2018). In this backdrop,it is imperative
to empirically investigate beforehand that whether the green economy would be successful
in achieving its main purpose that is stabilizing the world financial system because the
investment stakes aretoo high for this green transition. Furthermore, itis equally important
to investigate the role of green growth in mitigating economic risk, environmental risk (i.e.
transition risks, physicalrisks and liability risks) and societal risk to create a stable financial
environment.
Consequently, the objective of this study is to investigatethe impact of green growth on
FS based on the growth-led finance hypothesis. As the green economy was initiated as a
response to the financial crisisand it is perceived as the way toward a stable and sustainable
global financial ecosystem.
This research is a pioneerstudy that empirically investigates the impact of greengrowth
on FS through using the two-step system generalizedmethod of moments (GMM) estimator
to circumvent the problem of autocorrelation, heteroscedasticity and endogeneity.
Furthermore, it has been theoretically proposedthat green growth creates FS (UNEP, 2011;
Bina, 2013;Megwai et al., 2016;Georgesonet al.,2017). However, a comprehensive approach
to investigate this relationshipwas largely ignored by the empirical literature. The empirical
literature mostly focused oninvestigating the green growth-FS nexus though the individual
dimension of green growth. Where, Odhiambo (2008),Ertugrul et al. (2019) and Khan,
Ahmed and Bibi, Chinoda (2020) has focused on economicgrowth and FS relationship while
Dietz et al. (2016), Battiston et al. (2017) and Dafermos et al. (2017,2018) investigated the
relationship between climate change and FS. Income inequality and FS nexuses was
explored by Holt and Greenwood (2012),Wisman(2013) and Cairo and Sim (2020). However,
it has been documented that green growth is considered an alternate version of economic
growth which emphasizeson triple bottom approach that focuses on economic growth while
simultaneously achieving social well-being and higher environmental quality. Therefore,
developed on underlining assumptions of growth-led finance hypothesis, current study
investigates green growth as a driver of FS because together with economic growth,
environmental risk and social inequality are equally important elements that are affecting
FS of country.
JFRC
29,5
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