Green bonds and sustainable development: theoretical model and empirical evidence from Europe

As a novel financial instrument, green bonds require further research to understand their causal effects and theoretical mechanisms on sustainable development fully. This paper constructs a theoretical model that characterizes the issuance of green bonds as the extent to which social planners prioritize environmental benefits in bond markets. In this model, we define sustainable development as the geometric mean of environmental factor inputs and final production output. By maximizing consumer utility, this model elucidates the direct and non-linear relationship between green bonds and sustainable development. The paper empirically investigates this proposition using data from 19 European countries between 2018 and 2022. The results indicate that: (1) Green bonds significantly promote sustainable development. This financial instrument, designed to raise funds for environmental projects, can indeed promote sustainable development through clean and green resource allocation. (2) The promotional effect of green bonds on sustainable development increases significantly with improvements in innovation efficiency, industrialization rates, and savings rates. This finding elaborates on the conditions under which the positive impact of green bonds on sustainable development is enhanced. (3) Green bonds only promote sustainable development when a country's factor endowment structure reaches a specific threshold. Beyond this threshold, as the factor endowment structure becomes very high, the country's sustainable development gains sufficient momentum, diminishing the role of green bonds. This finding suggests that the positive impact of green bonds on sustainable development is contingent upon certain properties reflecting the economic basis.