Green finance and business sophistication on environmental debt: a global analysis of net effects and policy thresholds

Abstract

There is limited empirical research on how business sophistication influences the effect of green finance in addressing environmental sustainability challenges across countries. This study adopts the resource-based view and institutional theory to examine how business sophistication shapes the relationship between green finance and environmental debt in developed and developing economies. Using panel data from 43 countries spanning 2014–2021, we employ two-step System GMM estimation to assess the conditional impact of green finance on a composite index of environmental debt (CO₂ emissions, water stress and deforestation). The results show that while green finance alone is associated with higher environmental pressures, its effectiveness improves significantly when moderated by business sophistication, with threshold values of 4.08 for carbon emissions, 3.85 for water stress, and 3.98 for deforestation. These findings are robust across model specifications, supporting the validity of the results and highlighting the critical role of business sophistication in augmenting green finance flows into tangible environmental improvements. As the first cross-country study to establish the moderating role of business sophistication, this research contributes new theoretical and empirical insights. The study concludes that green finance policies must be aligned with business sophistication levels to avoid counterproductive outcomes. Policymakers are advised to invest in strengthening innovation systems, knowledge absorption and corporate governance before scaling up green finance interventions.