The Role of Green Finance in Fostering the Sustainability of the Economy and Renewable Energy Supply: Recent Issues and Challenges

Abstract

Nowadays, European countries, while implementing the goals of sustainable development, are trying to be energy secure by reducing energy consumption and switching to renewable energy sources; the issue of green bonds is essential in the financing of these projects. This study aims to investigate the current situation and trends in green finance, identifies its problems and challenges, as well as determines the importance of green bonds in sustainability in general and renewable energy supply in particular. The authors conducted a bibliometric analysis of green finance and renewable energy, followed by an extensive literature review identifying the benefits and challenges of green bond investments, continued with an empirical study that included hypothesis testing and the creation and analysis of the EU countries clusters, which have not been sufficiently studied to date. A study examining trends in green finance, identifying its benefits and challenges, found that green bond investments have a positive impact on carbon reduction and renewable energy supply in the EU OECD countries, and cluster analysis of the European OECD countries indicated a positive relationship between economic performance and overall ESG risk.

1. Introduction

Green finance plays a vital role in achieving the Sustainable Development Goals (SDGs), especially SDG 7, in accordance with the UN Agenda 2030 [1]. Green finance projects comply with the framework of the 2015 Paris Climate Agreement, which focuses on mitigating global warming and is an important basis for the development of the global green bond market [1].

Bibliometric analysis reveals that while the previous articles are mainly related to green finance for developing countries, especially China, the latest ones are related to the risks of climate finance, green bonds and the inclusion of financial issues in the wider regions of energy emissions; these studies provide useful insights for researchers, investors, and policymakers on the importance of environmental investments in promoting economic sustainability [2,3,4,5,6,7,8,9].

Due to the growing interest and massive European movement towards a greener society and business, the term green finance is used to describe the different types of products created to support both public and private green investments, as well as initiatives and policies to endorse the execution of environmental mitigation or adaptation projects.

The task of green finance is to strategically include the financial sector in the transition to minimal carbon emissions and to solve climate problems, as well as to increase economic well-being; therefore, it mainly focuses on the environmental aspect of sustainable development [10,11,12,13,14].

The popularity of green finance stems from the consideration of preventing potential climate crises, making it a priority within each country’s policies and global formats for their cooperation. At the same time, the broader and more organic integration of green finance in the context of economic activity results from the awareness of economics consistency in a given time perspective, if the climate impact of economic activities is ignored, and the risks associated with climate change are not mitigated.

Between 1980 and 2021, weather and climate-related extremes caused economic losses estimated at EUR 560 billion in the EU Member States, of which EUR 56.6 billion is from 2021 alone [15].

Extensive research has been conducted analyzing the relationships between higher spending on human resources, green energy research and development, and the growth of the green economy, emphasizing the intermediary role of green finance. However, the impact of the growth of the green economy on GDP per capita differs between countries with different starting points of economic development, which has not been sufficiently studied [16,17].

Recent studies prove that green finance promotes the use of renewable energy, with incremental positive effects. However, this effect can be observed in developed countries or emerging economies with strict environmental protection and high influence of green finance [18,19]. The development of capital markets and bond markets affects the use of renewable energy [20,21]. However, in general, in recent years, green finance studies have mostly been conducted in developing countries; only a few thorough studies on European countries can be found [19,22,23,24,25].

Based on the analysis of recent studies and determining the research gap, the authors chose to study the issues related to green finance and their impact on renewable energy in European countries, and based on the availability of secondary data, the European OECD countries were analyzed in the empirical study, which also allows for the determination of the overall landscape of European countries due to low dropout rates.

The aim of the study is to analyze the current situation and trends in green finance, address the issues and challenges, as well as to highlight the role of green bonds in ensuring sustainability and affordable and clean energy.

The authors used both qualitative and quantitative research methods, such as bibliometric analysis with network mapping and publication clustering, and extensive analysis of the selected literature, paying special attention to the challenges of green finance and green bond development. Based on the literature review, two hypotheses were stated and tested on the EU OECD countries, followed by regression analysis. As a second step of the empirical study, similar groups of clusters of the European OECD countries were created by the country’s income level, the ESG risk rating, and the amount of issued green bonds.

As limitation of the research, it can be mentioned that green energy issues were studied only in the macroeconomic aspect, paying special attention to benefits and challenges, the empirical research is based on the most popular green financing instruments—green bonds at the European OECD country level and hypotheses testing for the EU OECD countries

This paper consists of an extended literature review based on bibliometric analysis, identifying the benefits and challenges of green finance; the empirical part consists of a test study of hypotheses about the impact of green bonds on CO₂ emission and renewable energy supply, as well as cluster analysis of the European OECD countries carried out by the authors, followed by discussions and conclusions.

2. Literature Review

2.1. Bibliometric Analysis

Green finance, unlike traditional finance, links the financial sector and business with environmental protection, tries to combine environmentally friendly behavior with economic profitability. To identify relevant research on the topic of green finance in the last ten years, by performing a bibliometric analysis, the authors used Scopus and Web of Science databases with the keywords “green” and “finance” to search for relevant publications (no additional filters were used to limit search results). A search was performed in June 2023 and results were visualized by using VOSviewer software version 1.6.19 [26].

The main scientific databases show that the publications related to green finance are quite recent—a rapid increase in the number of publications starts only from 2018, as can also be seen in the inscription in Figure 1. In the network mapping of the Scopus search results, based on the available keywords, seven sets of publications were created, which allowed the authors to identify the most covered areas in academic literature. The strongest publication correlations emerged between green finance research and specific geographic areas. During the analysis, it was found that the top publications from the Scopus database are related to a particular geographical area—China [27,28,29]. While performing a bibliometric analysis of keywords from Web of Science indexed publications, four clusters were created with references to the following research areas—(1) investments and green finance, (2) environmental impact of green finance, (3) research and policies related to green finance, (4) China-related green finance studies (see Figure 2).

Analyzing Figure 2, the fourth area can be considered a crosstab with the previous three areas, as publications related to Chinese geography can be found in all previous research areas. The most often cited studies from the three areas identified by the authors are shown in

Table 1. Most cited articles categorized in areas of green finance.

Area of Research	Research Title; Reference
Investments and green finance	The way to induce private participation in green finance and investment [30] Fostering green development with green finance: An empirical study on the environmental effect of green credit policy in China [31] Oil price shocks, geopolitical risks, and green bond market dynamics [32]
Environmental impact of green finance	Demonstrating demand response from the water distribution system through pump scheduling [33] Influence of digital finance and green technology innovation on China’s carbon emission efficiency: Empirical analysis based on spatial metrology [13] Research on the use of digital finance and the adoption of green control techniques by family farms in China [14]
Policies and research on green finance	Financial inclusion and green economic efficiency: evidence from China [34] The role of green finance in environmental protection: Two aspects of market mechanism and policies [35] Influence mechanism between green finance and green innovation: exploring regional policy intervention effects in China [36]

.

Investment and green finance cover several areas, such as the tax refund policy in the case of green credit guarantee schemes [30] or the study of the Green Credit Policy established by the Chinese government in 2012 [31] and its impact on the economy. The authors identified a specific study that examines the impact of green finance investments on bank lending, arguing that green finance can have a negative impact on bank lending in general [37]. In the investment field, there are also studies related to green finance in the form of green bonds in relation to oil prices and geopolitical risks, as well as investments in renewable energy and their impact on environmental issues [32].

Environmental impact issues are some of the key elements in all green finance studies. Studies indicate contradictions that can be identified while summarizing the types of green financial products [35]. Environmental quality and ecological balance are observed in combination with green finance and economic development in China [38].

Policies and research on green finance cover many examples of China [34,36]. There is also research that describes improvements of banking nonperformance credit indicators by adding a higher proportion of loans that qualify under the China Green Credit Policy [39].

Green finance studies also cover other research areas than those listed in Table 1. Other areas of green finance found in the literature are the combination of green finance with innovation as a result of the digitalization of financial services [40,41]. Sustainability is also explored as part of the merging of green finance and fintech. Other research conducted in China indicates that fintech innovations are related to economic development mainly via two green activities—green credit and green investments [42,43,44].

Green digital finance refers to the use of digital technologies to promote investment in environmentally sustainable projects and includes crowdfunding platforms for green projects, blockchain-based systems for tracking and verifying sustainable investments, and the use of artificial intelligence in investments to manage environmental risks.

2.2. Benefits of Green Finance

Definitions of green finance can be found in several publications—[45] indicates that there are very large differences between the definitions of green finance, as well as different types of organizations, economic sectors define their own indices and definitions of what is described as green finance. According to a 2016 publication by the World Bank Group [46], green finance could be broadly defined as “the financing of investments that provide environmental benefits”.

Other researchers [47], while studying the evolution of green finance and its enablers, concluded that the enablers can be classified under a number of wide-ranging factors, for example, economic indicators, expansion of supervisory and governing framework, possibilities and support for investments, commitment of the governmental and other authorities to provide help and support, scientific and technological progresses, development and regulation of financial and capital market products. As mentioned in the field of investment and green financing (see Table 1), one of the most important green financial instruments is green bonds. Green bonds appeared in current years as a response to the severe need to assemble capital to reinforce the United Nations’ Sustainable Development Goals, as well as the objectives of the Paris Agreement. Hence, nations are proceeding towards a low-carbon and climate-resilient future, and, as a result, there is a growing need for financing solutions. Green bonds are supposed to generate and transfer capital from capital markets for various projects, including climate change mitigation and adaptation, renewable energy projects, and others [48]. Green bonds are built like traditional bonds—fixed-income debt instruments. An additional tendency in the market is the speeding up of sovereign green bond issuances as governments wish to advance sustainable policies and fulfil their national sustainability agendas [49,50,51]. The success of a green bond issue is determined by the issuer’s reputation, sufficiently good credit rating and environmental, social and governance performance [52].

The authors summarized the main benefits of the development of green finance and the issue of green bonds in

Table 2. Benefits of the development of green finance and the release of green bonds.

Issue	Benefit	Reference
Society (solve issues related to the environment)	Lower carbon emissions	Sangiorgi and Schopohl [24], Gianfrate and Peri [53], Fatica et al. [54], Al Mamun et al. [55], Huang and Zhang [56], Chang et al. [57], Koval et al. [58], Koziol at al. [59], Umar and Safi [60]
	Fosters renewable energy production, utilization	Anton and Nucu [20], Huang et al. [22], Cheng et al. [61], Wang and Taghizadeh-Hersay [62]
Regional development		Hou et al. [18], Huang and Zhang [56], Mejia-Escobar et al. [63]
Issuers	Access to capital at lower costs	Teti et al. [64]
	Stimulate technological innovations	Madaleno et al. [9]
	Stimulate financial performance	Du et al. [65]
Investors	Diversification of investments	Liaw [7], Orzechowski and Bombol [23], Sangiorgi and Schopohl [24], Bužinskė and Stankevičienė [52], Gianfrate and Peri [53], Ferrer et al. [66], Hadaś-Dyduch et al. [67], Chopra and Mehta [68]

.

As can be seen from the Table 2, the development of green financing in general, and green bonds in particular, affects issuers, investors, and regional development, solves environment-related issues, but specifically solves environment-related issues, namely lower carbon emissions and promotes the production and utilization of renewable energy.

Green bonds, being the largest single source of green finance, have had a significant impact on the renewable energy supply sector by providing a crucial source of financing for renewable energy projects [69,70,71]. They are designed to fund projects that have positive environmental and climate-related benefits, such as renewable energy infrastructure, energy efficiency initiatives, and other environmentally friendly projects. Some of the key impacts of green bonds on renewable energy supply, which are expected to benefit most from the growing popularity of green bonds, are also identified.

Green bonds have channeled substantial investments into the renewable energy sector. This additional financing has enabled the development and expansion of renewable energy projects that might have otherwise been delayed or underfunded due to the high upfront costs associated with renewable energy infrastructure. The growth of the green bond market is directly influenced by economic stability, the legal environment and the green bond interest rate [3].

The availability of green bonds has expedited the deployment of renewable energy technologies. With sufficient funding, renewable energy projects can be implemented on a larger scale and at a faster pace, contributing to the global transition to cleaner energy sources. A number of research papers support this argument by providing evidence that green bonds significantly foster renewable energy production [19,22,72,73,74]. In particular, green bonds increase wind and hydro-energy consumption in OECD countries [62]. Simultaneously, green bonds do not meaningfully influence solar energy arrangements in these countries. A mutual connection between the volume of green bond and the usage of renewable energy can be observed in OECD countries. The previous research demonstrated that the existence and development of green bonds as financial instruments and well-developed regulatory guidelines on the field perform an important and affirmative role in encouraging investment in renewable energy [22,75]. Nevertheless, oil price volatility and geopolitical risk have a contrary effect.

Green bonds have the potential to significantly impact carbon emissions by providing a financial mechanism to support environmentally sustainable projects and initiatives. Projects that have positive environmental or climate-related benefits can include renewable energy infrastructure, energy efficiency improvements, sustainable transportation, afforestation, and other initiatives aimed at reducing greenhouse gas emissions and mitigating climate change.

Green bonds attract a diverse range of investors, including those specifically interested in environmentally responsible investments. This broader investor base has expanded the pool of funds available for renewable energy projects, reducing dependence on traditional sources of funding and potentially lowering financing costs. Instruments like green bonds obtained approval from investors caring about environmental issues, and those investors looking for portfolio diversification, while the green bonds are such an instruments capable to provide such a diversification [6]. Another research stipulates that the green bond as a market is interesting for both new investor groups and those searching for capital injections [76].

As the renewable energy sector gains access to more capital through green bonds, economies of scale can be achieved. This often leads to cost reductions in renewable energy technologies, making them more competitive with fossil fuels and contributing to their wider adoption. The data demonstrates that the spread between green bonds and conventional debt instruments is about 35–40 bp lower [64]. Moreover, green bonds should be considered as an efficient instrument allowing to diminish the costs of debt financing and to develop environmentally friendly projects.

The success of green bonds in the renewable energy sector has inspired other industries to consider issuing similar bonds to fund environmentally friendly projects, thereby creating a positive spillover effect across various sectors. A complex study was conducted on dependence structure and dynamic connectedness between green bonds and financial markets. There is a relevant indication of the high level of integration between financial market and green debt financing instruments. Moreover, it should be considered that the global equity market is the net spillover spreader, although the global corporate debt market is the net spillover receiver [77].

2.3. Challenges of Green Finance

Green bonds are an essential element in achieving sustainability goals. Nevertheless, there are no common rules or standards for green bonds, bringing to life the discussion about greenwashing. The European Union (EU) Commission’s action plan on funding sustainable growth includes the framework of an EU green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure [48]. In addition, the International Capital Market Association’s Green Bond Principles [78] and the Climate Bonds Initiative’s Climate Bond Standards [79] clarify whether a bond qualifies as green.

As shown in Figure 3, there are four main principles that define a bond as green. Nevertheless, no specific legal requirements for issuing green bonds exist, which would hinder the transparency and market participants’ interest in such a product. Further, the authors summarize the challenges for green finance and green bonds development by splitting them into four different groups: market-, issue-, investor-, and law-related ones.

As

Table 3. Challenges for green finance and green bond development.

Issue	Challenges	Reference
Market	Macroeconomic environment	Anh Tu et al. [80], Torvanger et al. [81], Ejaz et al. [82], Doğan et al. [83]
	General bond market development	Du et al. [65], Deschryver and De Mariz [76], Elsayed et al. [77], Torvanger et al. [81], Ge et al. [84]
	Greenwashing	Bužinskė and Stankevičienė [52], Deschryver and De Mariz [76]
Issuers	Costs of meeting requirements	Deschryver and De Mariz [76], Alsmadi et al. [85]
Investors	Insufficient financial and economic benefits	Maltais and Nykvist [3], Bužinskė and Stankevičienė [52], Wu (2022) [87]
	Lack of labelled green bond	Li et al. [75], Deschryver and De Mariz [76]
	Lack of green bond project impact information	Deschryver and De Mariz [76], Jankovic et al. [88]
Law	Lack of regulation	Peng et al. [73], Pyka (2023) [86]

shows, a vast majority of identified challenges deal with market-related factors, varying from the overall macroenvironment to the greenwashing risks (as studied by other researchers [52,65,77,80,81,82,83,84]). There is evidence that issuing green bonds comprises a challenge in terms of costs of meeting corresponding requirements [82,85]. The whole group of challenges in relation to investors’ perspectives addresses problems of lack of financial and economic benefits for opting for green bonds, green bond labeling and scarcity of information about green bond project impact, which is pivotal to support a long-term investment case. Regulatory flaw backs were also cited as a challenge to green bonds [73,86].

However, the size of the green bond market remains small compared to the challenges it is meant to address and to the overall traditional bond market [52,53,64,74,77].

As part of the impact of green financing on the environment, studies related to the water supply system and its financial benefits in terms of the optimization of electricity consumption have been conducted [33]. There are even attempts to create a low-carbon financial index [89] and rate countries on their investment in low-carbon energy.

Digitization has great potential within the green transformation; however, the integration of digital technologies into finance does not automatically have a highly positive impact on the environment and climate change. A group of authors [90,91,92] argues green technology innovation is facilitated by digital finance in a way that digital finance encourages business innovation in green technology by alleviating financial constraints. Green energy technology awareness is studied but not sufficiently from the investor’s perspective—how important it is in investment decision-making and how it can be integrated in financial satisfaction of investors [93,94] and any other involved stakeholders [95].

Based on the literature review, the authors notice the relationships of the issue of green finance, especially green bonds with overall environmental challenges and, therefore, the following hypotheses were stated:

H1. 

Green bond investments have a positive impact on carbon emission intensity.

H2. 

Green bond investments have a positive impact on renewable energy supply.

3. Data and Analysis Results

3.1. Hypothesis Testing and Regression Analysis

Based on the literature analysis, the authors chose the European OECD countries as the object of the empirical study, initially setting the task of hypothesis testing and regression analysis.

For the current part of the empirical study, the following 2021 data on the EU OECD countries were used for the study:

(a)

Green Bonds issued by country, cumulative to GDP—CBG (Climate Bonds initiative, 2023);

(b)

Carbon Emissions Intensity—CEI (Morningstar, 2023);

(c)

Renewable energy supply as % total energy supply—RES (OECD, 2023).

Firstly, the authors performed a descriptive statistical analysis on the selected variables (see

Table 4. Descriptive statistics of the green bonds issued by the country, cumulative to GDP, carbon emissions intensity, renewable energy supply as % total energy supply in 2021.

Variable	Mean	Median	Std. Dev	Min	Max
CBG	3.8084	3.2198	3.4510	0.1170	11.8862
CEI	0.2111	0.1722	0.1167	0.0653	0.5036
RES	23.6419	17.5100	13.3158	8.8600	50.9400

).

Table 4 indicates that green bonds issued by the country in the EU, cumulative to GDP levels, range from 0.12% to 11.9% with a mean value of 3.81% and a median of 3.22%. A similar picture can be observed for the intensity of carbon emissions (0.07 to 0.50 with a mean of 0.21 and a median of 0.17) and renewable energy supply as % total energy supply (from 8.86 to 50.94% with an average of 23.64% and a median of 17.51). This points to the very different treatment of this important funding instrument for the environment and to the significant challenges in implementing a common EU environmental policy.

Further, to test the hypotheses, the following models were compiled and calibrated:

$$\mathit{CEI}=f\left(\mathit{CBG}\right)+{\epsilon }_1,$$

(1)

$$\mathit{RES}=f\left(\mathit{CBG}\right)+{\epsilon }_2,$$

(2)

where CEI—carbon emissions intensity; CBG—green bonds issued by the country, cumulative to GDP; RES—renewable energy supply as % total energy supply; ${\epsilon }_1$, ${\epsilon }_2$—error terms of the respective regression model.

Finally, RStudio version 2023.06.1-524 was used to test regression models, their parameters, and assumptions (RStudio, 2023).

As can be seen from the results in

Table 5. Regression models CEI and RES variable and parameter estimates.

Variable—Parameter	Model—CEI		Model—RES
	Estimate	Sig	Estimate	Sig
CBG	−0.0589	0.0006	2.0363	0.0338
CBG2	0.0033	0.0170	-	-
Intercept	0.3507	0.0000	16.2974	0.0009
Multiple R	0.7767		0.4647
R2	0.6033		0.2160
Adjusted R2	0.5637		0.1747
Standard Error	0.0771		12.0967
F	15.2092	0.0001	5.2342	0.0338

above, both calibrated regression models are statistically significant, as evidenced by the p-values of the F-tests (significantly below 0.05). Consequently, justifications have been obtained for confirming hypotheses H1 and H2.

As a next step, the authors performed assumption tests of the regression models, and the results are shown in

Table 6. Regression models CEI and RES assumptions test results.

Test Type	Model—CEI		Model—RES
	Estimate	Sig	Estimate	Sig
Shapiro–Wilk normality test	0.9095	0.0398	0.9737	0.8117
Breusch–Pagan Test for Homoscedasticity	2.6657	0.2637	0.0365	0.8485
Durbin Watson Test for Autocorrelation	2.1586	0.7460	1.9462	0.8960
Link function	0.1104	0.7396	1.2772	0.2584

.

As shown in the Table 6, the homoscedasticity, autocorrelation, and link function assumptions of both models are fulfilled at a confidence level significantly above 0.05, but the normality test failed for the model CEI. In order to address explanatory variable endogeneity possible issues, the Gaussian copula correction (GC) method with bootstrapping (N = 1000) applying the REndo package was used [96], and its results were summarized in the following

Table 7. Regression models CEI and RES parameters with copula corrections.

Model	Variable	Orig. Estim	GC Estim	bootSE	CI 2.5%	CI 97.5%
CEI	CBG	−0.0589	−0.0539	0.0201	−0.1098	−0.0322
	CBG2	0.0033	0.0034	0.0016	0.0001	0.0067
	Intercept	0.3507	0.3322	0.0723	0.2569	0.5230
RES	CBG	2.0363	2.1910	1.0438	0.0063	4.3757
	Intercept	16.2974	15.793	9.312	2.332	38.054

.

As can be seen from Table 7 above, the unbiased estimates of regression parameters obtained applying the Gaussian copula correction method with bootstrapping only slightly differ from the original estimates. This could be explained with relatively low correlation between regressors and the errors (rho(CEI) = −0.0585; rho(RES) = −0.0287) in models (1) and (2). Consequently, sufficient evidence has been obtained to enable the results of the regression analysis to be used for interpretation and support of conclusions.

The results of the analysis performed show significant differences between the indicators between the countries, and, further, the authors will attempt to determine the factors forming these differences through clusters.

3.2. Cluster Analysis

As a second step of the empirical study, the task is discovering similar groups or clusters of countries, while analyzing such variables as the country’s income level, the country’s ESG risk rating, and the amount of issued green bonds (in the second stage of the analysis).

Different researchers have already analyzed the sustainability aspects within the investment decisions and financial and capital market instruments. The authors, being particularly interested in green bonds, start their research with an analysis on the macro level taking a closer look at European OECD countries and their sustainability characteristics. The novelty of the current research is the usage of the k-means clustering method (a non-hierarchical cluster analysis technique) to minimize the accumulated squared distance from the center, while the purpose is to determine the number of countries’ clusters to provide a deeper understanding of different sustainability and economic development aspects. Such an approach provides the possibility to find “similar” countries in each cluster, demonstrating comparable characteristics, not only in terms of development in the domain of sustainability but also in terms of economic and political structure. This study could be considered as a guideline to measure each country’s weaknesses and successes within sustainable development.

The authors take as a basis the level of ESG risk determined by a leading data provider in the field of sustainability, Sustainalytics [97], forming it from three significant indicators Natural and Produced Capital (including 11 environmental and environment-related factors), Human Capital (including ten social factors) and Institutional Capital (consisting of 10 governance-related elements).

As a proxy for the first and the second variable mentioned above, the authors use the volume index of gross domestic product (GDP) per capita in purchasing power standards that is expressed in relation to the European Union average and published by Eurostat [98] on the annual basis and country’s environmental, social and governance (ESG) risk score determined by Sustainalytics [97]. In the first step, the authors selected clusters based on the first and the second variable; the results are presented below (follow Figure 4), where X-1 stands for the country’s income level and X-2 describes the country’s ESG risk rating.

Figure 4 shows that Cluster-0 (RED) includes countries such as Ireland, Luxembourg, and Norway, and is characterized by the highest level of economic wealth and negligible or low level of ESG risk. Cluster-1 (BLUE)—the most significant cluster—includes such countries as the Czech Republic, Estonia, France, Greece, Hungary, Italy, Latvia, Lithuania, Poland, Portugal, Slovakia, Slovenia, Spain, UK, and is characterized by the lowest comparable level of economic strength and middle level of ESG risk. Cluster-2 (GREEN) comprises countries like Austria, Belgium, Denmark, Finland, Germany, Island, Sweden, Switzerland, and The Netherlands, and is characterized by the average comparable level of economic strength and predominantly middle level of ESG risk.

The clustering results indicate that the higher level of a country’s economic strength measured as GDP per capita and compared to average in Europe, the better the ESG rating (meaning the lower the ESG overall risk considering environmental, social, and governmental issues). It is worth noting, in general, that all the European OECD countries look attractive globally, demonstrating a high level of economic development and low-to-medium ESG risk; however, differences between the countries within the region exist.

In the second step, the authors added another variable—the overall amount of green bonds issued in billions of USD as calculated by the Climate Bonds Database [99]. The results are shown below (see Figure 5), where x represents the country’s income level, y represents the country’s ESG risk rating, and z is the total amount of green bonds issued.

Figure 5 shows that Cluster-0 (RED) comprises countries like Austria, Belgium, Denmark, Finland Island and Switzerland; Cluster-1 (BLUE)—one of the most minor clusters—includes countries such as Ireland, Luxembourg, and Norway; Cluster-2 (GREEN)—the smallest cluster—includes France and Germany—the leaders considering the highest green bonds amount issued; Cluster-3 (YELLOW) comprises countries such as the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovakia, and Slovenia; Cluster-4 (PURPLE) comprises countries such as Italy, Spain, Sweden, the UK, and The Netherlands.

As a result of the second clustering, the number of clusters increased from three to five, and it was also identified that the economically most robust countries with a lower overall ESG risk level do not show higher financial market activity in the field of green bonds.

Most often, supranational and governmental initiatives emphasize the importance of environmental and social goals; however, it is worth considering governance as a prerequisite for achieving sustainability [100,101]. The ongoing debate about the importance of Institutional Capital in both the scientific literature and the financial industry led the authors to conduct a similar clustering for the range of the European OECD countries (as performed above) while analyzing such variables as the country’s Natural and Produced Capital, and the country’s Institutional Capital.

As a proxy for the first and the second variable, the authors use the Natural and Produced Capital score determined by Sustainalytics [97] and include variables such as energy and carbon intensity, renewable energy consumption and energy imports, natural disasters, water productivity, habitat protection, etc. (where high overall score leads to the higher ESG risk and vice versa) and the Institutional Capital score established by Sustainalytics [97] and include such variables as government effectiveness, regulatory quality, rule of law, control of corruption, ease of doing business, etc. (where high overall score leads to a higher ESG risk and vice versa).

The authors successively identified clusters, and the results are presented below (see Figure 6), where X-1 stands for Natural and Produced Capital score and X-2 stands for the country’s Institutional Capital score.

As Figure 6 shows, the four determined clusters were Cluster-0 (RED), which comprises countries like Austria, Denmark, Finland, France, Germany, Island, Ireland, the UK, and The Netherlands; Cluster-1 (BLUE), which comprises countries such as Greece, Hungary, Poland, and Slovakia; Cluster-2 (GREEN), which consists of such countries as Luxembourg, Norway, Sweden, and Switzerland; Cluster-3 (YELLOW), which comprises countries such as Belgium, the Czech Republic, Estonia, Italy, Latvia, Lithuania, Portugal, Slovenia, and Spain.

The cluster analysis makes it possible to determine that Cluster-2 (GREEN) is characterized by minimal environmental risk and significant achievements in the field of governance, whereas Cluster-1 (BLUE) is made up of countries with a higher level of environmental risk and more governance concerns, where improvements are possible.

4. Discussion and Conclusions

Considering the importance of green finance and green bond investment development to reduce carbon emissions and increase renewable energy consumption to mitigate the threat of climate change, this study attempts not only to determine green finance benefits and challenges, but also examines whether green bonds have an impact on carbon emission intensity and renewable energy supply in the EU OECD countries and determines, through the analysis of clusters of the European OECD countries, a positive relationship between economic indicators and overall ESG risk.

From the bibliometric analysis, it can be concluded that green finance began to be widely studied from 2018 and the main areas of green finance are investments and green finance (especially green bonds), the impact of green finance on the environment, and policies related to green finance.

A bibliometric review indicates that China is the largest source of publications on this topic, and the current study is devoted to European countries, especially OECD members [102]. Green bonds can be considered as a tool to promote energy projects and significantly reduce carbon emissions [103], while another study proves that traditional energy funds outperform renewable energy funds [104].

From the bibliometric clustering performed, the authors identify the potential for additional research to be conducted on the topic covering the geographic areas of Europe and America. The field’s evolution shows a clear movement from an international perspective to a nationally determined discussion on finance to the green transition [4].

The literature analysis carried out as part of the study allowed the identification of the main benefits of green financing, such as lower carbon emissions, production and utilization of renewable energy, availability of capital at lower costs, stimulation of technological innovation and financial performance of the issuer, as well as diversification of investments; at the same time, there are several challenges such as greenwashing, high costs associated with renewable energy infrastructure, diversification of investments, labeled green bond, green bond project impact information and regulation.

The results of the analysis of the regression models (1) and (2) indicate a statistically significant impact of green bonds on both carbon dioxide emissions. As this type of funding increases, the negative environmental impact decreases, and the share of renewable energy in the total energy supply and the supply of renewable energy increases as green bond funding increases. The result obtained is consistent with findings of other studies [18,23,54,55,58,60,62,74].

Many supranational and governmental initiatives highlight the importance of environmental and social goals. Nevertheless, it is worth considering governance as a pre-condition for achieving sustainability [100,101]. The studies examine investments in renewable energy and suggest that governments introduce green finance policies and regulations [32].

The evidence for all the European OECD countries shows that there is minimal environmental risk is visible if the country is capable of showing significant achievements in the governance domain, and vice versa. It can be concluded that one of the pre-conditions for achieving sustainability is the application of appropriate governance standards including the rule of low level of corruption, attractive conditions for business, etc.

The main policies are the creation of a green financial market, the development of green digital financing tools and the development of renewable electricity production, from location and investment to carbon market policy [19].

In conclusion, green bonds have played a crucial role in accelerating the growth of the renewable energy supply by providing necessary funding, driving innovation, and encouraging greater environmental responsibility among businesses and investors. This financial mechanism has contributed significantly to the global efforts to transition to a more sustainable and low-carbon energy future.

However, despite the important role played by green bonds in increasing renewable energy production capacity and reducing carbon emissions, this form of financing for environmental restoration is undervalued in European countries and requires cardinal changes and the implementation of a common environmental policy to achieve SDG 7, in accordance with the UN Agenda 2030.

Previous research is searching for evidence that low ESG risks are contributing to better economic growth [105,106], but the results are neither homogeneous nor stable; however, current research notices that the higher level of a country’s economic activity measured as GDP per capita could be attributed to the better ESG rating.

Green digital finance is among the concepts that have entered the academic discourse only in the last two years and thus it still lacks an immediate definition. At the same time, its use in the new research highlights several important points that should be given more attention by the scientific community, considering both their academic and practical importance.

Further research can be conducted on the development of green digital finance, identification of factors influencing it, including regulation of green finance at the national and international level, formation of green digital finance clusters, and expansion of the research area with environmental factors.