Green finance, social inclusion, and sustainable economic growth in OECD member countries

The study addresses how green finance and social inclusion affect sustainable (inclusive green) growth in OECD countries. Motivated by escalating climate risks and the need to achieve sustainability commitments (e.g., Paris Agreement), the paper notes rapid growth in global green finance and ongoing policy attention to social inclusion. Focusing on 31 OECD countries (2010–2021), the authors investigate whether expanding green finance markets and improving social inclusion contribute to ecological prosperity, given OECD efforts like the Green Growth Strategy and CEFIM. They aim to fill a gap by jointly examining green finance and social inclusion as determinants of inclusive green growth in OECD economies and by constructing a social inclusion index and adopting an inclusive green growth indicator.

Prior work links sustainable development with improved resource efficiency, innovation, poverty reduction, and multifaceted drivers (Bertinelli et al., Marques et al., Filimonova et al., Abed-Segura & Zamar, Xu et al., D’Adamo et al., Sun et al.). Studies on green finance show its potential to accelerate sustainability via mobilizing private capital, but efficacy depends on regulation, transparency, and financial development; evidence suggests green finance reduces emissions and can lower investment risks (Pang et al., Akomea-Frimpong et al., Wang et al., Umar & Safi, Wang & Fan, Shang et al.). Research on social inclusion indicates that inclusion can align with ecological goals through education, equality, and participation, potentially broadening investment in sustainable projects (Haase et al., Kohon, Villar et al., Carnemolla et al., Jabeen & Khan). However, the joint effect of green finance and social inclusion on sustainable growth in OECD members remains underexplored; this paper targets that gap by analyzing their impacts on an inclusive green growth index.

Data: Panel of 31 OECD countries (Australia, Austria, Belgium, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States) over 2010–2021 (372 observations). Dependent variable: Inclusive Green Growth (IGG) index following Jha et al. (2018). Main explanatory variables: Green finance market size (GFMS) from OECD statistics and Climate Bonds Initiative; Social Inclusion Index (SII) constructed per Hassan et al. (2022). Controls: Green FDI (GRFDI; following Hassan et al. methodology), Poverty rate (POVRA; % population, World Bank), Energy resource efficiency (ERE), and Economic uncertainty index (EUI; Zhao & Rasoulinezhad methodology; policyuncertainty.com). Expected signs: GFMS (+), SII (+), GRFDI (+), POVRA (−), ERE (+), EUI (−). Estimation steps: (1) Test cross-sectional dependence using Pesaran’s CD. (2) Panel unit root tests (LLC and IPS) to establish order of integration. (3) Panel cointegration tests (Westerlund and Kao residual) to confirm long-run relationships. (4) Long-run estimators: Fully Modified OLS (FMOLS) for baseline coefficients; Dynamic OLS (DOLS) for robustness. (5) Directionality: Dumitrescu–Hurlin panel Granger causality tests among key variables (IGG, GFMS, SII).

- Stationarity and cointegration: All series are I(1) per LLC and IPS; Westerlund and Kao tests indicate cointegration among variables. - FMOLS results (Table 6): • GFMS: 0.019 (p=0.000), positive and significant; a 1% increase in green finance market size relates to ≈0.019% higher IGG. • SII: 0.105 (p=0.329), not significant. • GRFDI: 0.418 (p=0.053), positive and marginally significant. • POVRA: −0.103 (p=0.194), not significant. • ERE: 0.329 (p=0.004), positive and significant. • EUI: −0.065 (p=0.037), negative and significant. - DOLS robustness (Table 7): • GFMS: 0.034 (p=0.014), positive and significant. • SII: 0.449 (p=0.693), not significant. • GRFDI: 0.220 (p=0.014), positive and significant. • POVRA: −0.492 (p=0.329), not significant. • ERE: 0.049 (p=0.002), positive and significant. • EUI: −0.193 (p=0.052), negative, marginally significant. - Causality (Table 8): Evidence of bidirectional causality between IGG and GFMS (both nulls rejected at conventional levels). IGG Granger-causes SII (p=0.000), while SII does not Granger-cause IGG (p=0.258). Overall: Green finance market size and green FDI support inclusive green growth; energy resource efficiency promotes IGG; economic uncertainty hinders IGG. Social inclusion and poverty rate are not significant predictors of IGG in this OECD sample characterized by industry-based structures.

Findings indicate that expanding green finance markets and attracting green FDI are effective channels for advancing inclusive green growth in OECD economies, likely by mobilizing private capital and enabling renewable energy and efficiency projects. Enhanced energy resource efficiency directly supports green prosperity, while higher economic uncertainty dampens investment and slows green progress. Contrary to expectations, social inclusion and poverty alleviation do not significantly influence inclusive green growth in the studied OECD context, suggesting that in industry-oriented OECD economies, financial-market-based drivers and technological efficiency improvements are more immediate determinants of green outcomes than social variables during 2010–2021. The bidirectional causality between IGG and GFMS implies a reinforcing loop: as IGG rises, green finance deepens, and greater green finance further elevates IGG. IGG’s causal influence on SII suggests that green progress may enable improvements in inclusion, even if inclusion does not contemporaneously drive IGG in this setting.

The study contributes by constructing a social inclusion index for OECD members, employing an inclusive green growth metric, and jointly estimating the roles of green finance and social inclusion. Results show that green finance market expansion, green FDI, and energy resource efficiency significantly promote inclusive green growth, while economic uncertainty impedes it. Social inclusion and poverty rate do not significantly affect IGG in the observed OECD sample. Policy recommendations include: expanding digital green finance (including blockchain-based tools) to broaden investor access and transparency; actively fostering green FDI to accelerate technology-driven sustainable projects; and establishing early warning systems to reduce economic uncertainty and crowd in private green investment. Future research should complement panel econometrics with country-level surveys, examine sensitivity of green growth to social crises and financial market fluctuations, and assess roles of environmental taxation and sustainable literacy in shaping the inclusion–green growth nexus within OECD countries.

- Scope restricted to 31 OECD countries over 2010–2021, which may limit generalizability beyond OECD or outside the study period. - Key constructs (inclusive green growth, social inclusion, economic uncertainty, green FDI) are measured via composite indices/constructed measures, which may entail measurement limitations. - The analysis is macro-panel and does not incorporate country-level survey evidence or microdata; authors suggest future work with surveys to better capture social and behavioral channels. - The study does not explicitly analyze environmental taxation or sustainable literacy, which are proposed for future investigation and may mediate inclusion–green growth linkages. - Results reflect an industry-based OECD context; relationships may differ in economies with different structures or policy regimes.