Assessing the Role of Green Finance Instruments in Enhancing Banks’ Environmental and Financial Sustainability

Abstract

In recent years, the worldwide push for sustainable development has transformed the banking sector into a major player in environmental responsibility through financial innovation. This research paper investigates the green finance tools' (green bonds, green loans, and sustainability-linked instruments) initiative in driving banks' environmental and financial sustainability. Although the trend to use these tools is increasing, the magnitude of the actual effect has not been well-identified, particularly in the case of emerging countries. The study utilizes a mixed-methods approach which includes financial ratio analysis and structural equation modeling to identify the link between adopting green finance and sustainability outcomes in the chosen commercial banks. Results indicate that such instruments go beyond compliance with environmental regulations to improving banks’ financial indicators like return on assets and credit quality. The research furthermore focuses on the protective role of the environmental performance in this relationship. The paper not only presents theoretical insights and practical guidelines but also the key role of green finance being embedded in the banking business for a sustainable future and responsible growth...