Chapter 2: Literature Review and Development of Constructs

Literature Review and Development of Hypotheses:

In recent years so many researchers and policy makers showed their interest in understanding
the relationship between growing green finance concept with economic growth and
sustainability in the context of South Asian Association for Regional Cooperation (SAARC)
countries.

Green finance is a calculated strategy to include the financial sector in the shift to resource-
efficient and low-carbon economies, as well as in the context of climate change adaptation
(Soundarrajan & Vivek, 2016).

Green finance and Economic growth:

The World Bank originated the concept of the "Green Bond" (GB), which was first proposed
in late 2010 with the goal of reducing excessive carbon emissions and slowing down climate
change (Zhou & Cui, 2019). Green bonds are a financing mechanism similar to traditional
debt instruments. These bonds can be sold with or without interest rates, with varying terms
on debt repayment and the recourse or non-recourse options available to the issuing
companies. As a result, GB provides strong assistance to important stakeholders including
traders, investors, and the community. GB trading on this specific stock market will offer
investors a new and alternative choice for portfolio diversification and optimization by using
the funds invested in this most recent risk-free securities (Browne, 1995). GBs provide
traders a new tool for trading, earning, and managing funds in both the primary and
secondary markets. They diversify unsystematic risk. The financial markets and economic
growth are "inextricably linked" and that growth gives financial structure "the wherewithal to
develop"(Greenwood & Jovanovic, 1990). Using panel generalized least squares (GLS)
multivariate regression analysis covering 41 Asian bond markets during the years 1990
through 2001 it was found that government security market development was positively
affected by such macroeconomic factors as the size of the economy, trade openness, capital
account openness, and distance from the equator. For corporate bond markets, institutional
factors such as control of corruption and the quality of the bureaucracy to promote growth
(Eichengreen & Luengnaruemitchai, 2004). The institutional and macroeconomic
determinants influencing the size and character of the sovereign bond market were estimated
by (Claessens et al., 2007) using panel data for 36 countries between 1993 and 2000 using
panel feasible generic least squares (FGLS) and OLS methods. They have also found that
bond market development and currency composition are influenced by the size, composition,
and rate of inflation as well as capital account openness was also discovered.
Carbon emissions and credit resource allocation are strongly linked. Multiple studies have
demonstrated that by distributing credit resources, financial organizations might reduce their
carbon dioxide emissions. Damage of the environment could be reduced by financial progress
(Hassan & Asall, 2014). The Gulf Cooperation Council (GCC) countries' CO2 emissions,
economic growth, electricity consumption, and financial development were thoroughly
studied by (Salahuddin et al., 2015). It was shown that financial development may drastically
reduce carbon dioxide emissions. Financial liberalization may be detrimental to the
environment if it couldn't be implemented inside a robust institutional framework also the
fundamental requirements for reducing carbon dioxide emissions are financial liberalization
and openness.(Tamazian & Bhaskara Rao, 2010). Industries will take more initiatives to
reduce emissions and the degree of carbon emission management will be more evident when
banks offer green finance on a broader scale.(Hu, Z. Y., Chen, C., & Zhang, W, 2013).
Scholars group keep emphasizing green credit as an essential component of green finance,
research the effects of green financial development on economic growth, and maintain that
the demand for green investments is fuelled by green financial activities and will therefore
directly contribute to economic growth while investment increases. This is in contrast to their
focus on the impact of green credit on the high quality of the green economy (Liu et al.,
2020). After researching how green credit affects economic growth, several academics came
to the conclusion that investments in green credit may greatly advance the growth of green
industries and directly support regional economic expansion (Labatt, S., & White, R. R.
(2002). John Wiley & Sons., n.d.).

An important factor in the global environmental quality has also been the growth of capital
markets. Firstly, firms mostly turn to stock market or securities because they provide them
with access to a variety of funding options, including debt and equity financing. The growth
of stock markets makes risk diversification strategies possible, which can benefit market
participants financially. This wealth impact increases demand for products and services,
particularly in the industrial sector, which raises carbon emissions (Sadorsky, 2011).
Conversely, advanced stock markets have the power to impose higher standards and ESG
regulations on listed firms. These regulations have the power to force firms to lower their
carbon emissions and enhance environmental quality in order to draw in more sustainable
funding, combined with required disclosures and stock market rankings of corporate
environmental performance.
A growing number of stock market developments are incorporating green finance policies as
a result of growing concerns about global warming. These policies encourage and facilitate
the development of additional funding sources for investments in green industries, which
offer a promising alternative to reducing carbon emissions and improving environmental
quality. In contrast to emerging economies, stock market indices lower carbon emissions in
industrialized nations through comparative study (Paramati et al., 2018). From 1992 to 2011,
they used data on total market capitalization per capita, total value of stocks traded per capita,
energy efficiency, population density, GDP per capita, and carbon dioxide emissions. They
did this by using the common correlated effects mean group estimator (CCE-MG). In order to
minimize energy intensity and consumption, increase energy efficiency, and lower financing
costs for the public and commercial sectors, established stock markets are required. This
situation improves the environment and aids in the promotion of energy-saving devices (Yue
et al., 2019).Similarly, from 1991 to 2012, 20 rising nations' in china use of renewable energy
was positively impacted by stock market development (Paramati et al., 2016).Due to the
potential advantages of renewable energies in lowering carbon emissions and global
warming, recent developments in stock markets demonstrate that ESG requirements and
green policies are being taken into consideration when allocating financial resources between
listed companies (equity financing and debt financing).

To achieve good economic development and progress, we must continuously strengthen the
relationship between environmental governance and economic growth in order to drive both.
Specifically, we must strengthen government intervention, encourage environmental
governance to become normalized in SAARC countries, drive economic development and
stability, and improve the relationship between environmental governance and economic
growth.In academic literature, environmental governance investment—which primarily
encompasses micro and macro perspectives—is frequently referred to as green investment.
Businesses should consider the effects of green investments on the environment, society, and
economy in addition to the advantages when evaluating them from a micro viewpoint
(Eyraud et al., 2013). So another name for it is "triple surplus" investment. From a macro
standpoint, investments that can support the expansion of the green GDP are referred to as
green investments(Starr, 2008).

Hypothesis 1 (a): Green bond is positively correlated with economic growth in SAARC
countries.

Hypothesis 1 (b):: Green credit is positively correlated with economic growth in SAARC
countries.

Hypothesis 1(c):: Green securities is positively correlated with economic growth in SAARC
countries.

Hypothesis 1 (d):: Green Investment is positively correlated with economic growth in SAARC
countries.

Green finance and Economic Sustainability:

More people believe that the financial industry is essential to quickening the shift to
sustainability and carbon neutrality. One explanation for this is the necessity of raising
significant sums of private cash to satisfy the investment requirements for accomplishing the
UN Sustainable Development Goals (SDGs) and the Paris Agreement's climate commitments
(Maltais & Nykvist, 2020). The financial services industry's contribution to effective capital
allocation is another factor. Because of this, the banking industry is a crucial place to
influence global economic developments (Hourcade & Shukla, 2013). More than 90% of
green bonds issued are of an investment grade (Tiftik et al., 2019) which indicate A & BBB
or AAA & AA ratings indicate that they have good to medium credit quality ratings.
According to a recent analysis of green bonds issued between 2013 and 2017, the average
yield on a green bond is two basis points (bps) less than the yield on an equivalent
conventional bond(Zerbib, 2019). Whatever the outcome of this discussion, it is certain that
the great majority of green bonds could have been issued as conventional bonds, with
minimal impact on the issuers' capacity to borrow money at favorable rates.

The green credit policy's primary goal is to lower business pollution emissions. When the
policy was first put into place, there was no discernible improvement in the environment or
policy effect. However, as the green finance system has continued to advance, there has been
a noticeable improvement in the relationship between GCP and air quality as per Su, C. W.,
Li, W., Umar, M., & Lobonţ, O. R. (2022).. Green credit policies can direct money from
highly polluting businesses to green industries inside the financial system in the context of
growing green capital shortages. This greatly enhances the capacity for environmental
regulation and energy efficiency.
The use of green indices to reflect the performance of the securities of companies that strictly
adhere to ESG principles and actively engage in environmental protection and climate change
adaptation is a significant driver of sustainable investment and corporate sustainable
development. "Green" indices serve as a benchmark for institutional and individual investors
looking to incorporate environmental considerations into their portfolios by tracking stock
performance in areas like energy efficiency, renewable energy production, pollution
mitigation, and advanced materials. Rather than "usual" securities, investors often keep
sustainable assets in their portfolios. Investors with conservative views who want consistent
performance and a reasonably high dividend return may consider using "green" assets. Put
another way, "green" investments fall under the category of comparatively defensive assets
that might offer investors extra value in terms of ESG considerations. Investments that are
comparatively defensive and might offer investors extra value in terms of ESG principles
(Shaydurova et al., 2018).

Hypothesis 2 (a):Green bond is positively correlated with economic sustainability in SAARC

countries.

Hypothesis 2 (b) : Green credit is positively correlated with economic sustainability in

SAARC countries.

Hypothesis 2 (c): Green securities is positively correlated with economic sustainability in

SAARC countries.

Hypothesis 2 (d): Green Investment is positively correlated with economic sustainability in

SAARC countries.

Green Finance and Foreign Direct Investment:

Institutions have a significant impact on corporate foreign direct investment (FDI) in

developing nations. Consequently, they may have a substantial impact on how companies
formulate and execute their internationalization strategies. The influence of institutional
features of the home nations of enterprises on corporate investment decision-making has been
examined in several studies. Researchers have shown that a firm’s incentive and capacity for
overseas direct investment (OFDI) rely on specific institutional elements in their home
nations. These studies have validated the impact of domestic institutional features, such the
level of judicial independence, on multinational firms' investment choices (Luo, Y., Xue, Q.,
& Han, B. (2010)., n.d.).the important motive of firms’ cross-border investment is to avoid
the institutional constraints of their own home countries (Deng, P. (2007)., n.d.)

Hypothesis 3: Green Finance is positively correlated with Foreign Direct Investment in

SAARC countries.

Foreign Direct Investment and Economic Growth:

It is believed that FDI only has a temporary impact on production growth. Nonetheless,
research into the mechanisms by which FDI can be anticipated to support economic growth
over the long term has increased as a result of the recent adoption of endogenous growth
theory(Grossman & Helpman, 1993). Endogenous growth models have the advantage of
assuming that institutional and national variables, in addition to technology advancements,
have an impact on long-term growth (Dunning & Lundan, 2008).
FDI inflows can be significantly impacted by a number of factors, including trade policy,
political stability, law, local market size, and balance of payments limitations.Technological
distinctions have received a great deal of attention in many theoretical frameworks as factors
influencing industrialized nations' growth and ability to compete internationally. In the
context of imperfect competition models of trade and growth size, as well as balance of
payments limitations, modern growth theories emphasize the importance of creative activities
and how they may have a major impact on FDI inflows(Grossman & Helpman, 1993). FDI
promotes rapid economic growth in host countries by augmenting the stock of human capital
and technological progress.
Hypothesis 4: Foreign Direct Investment is positively correlated with Economic growth in
SAARC countries.

Foreign Direct Investment and Economic Sustainability:

Neoclassical growth theory emphasizes that foreign direct investment (FDI) stimulates
economic growth in host nations by accumulating capital and acquiring new inputs and
foreign technology. According to the hypothesis, technical advancement is exogenous and
has a limited long-term growth effect since marginal returns to capital eventually decline.
However, FDI may boost the overall effectiveness of investments in host nations to generate
sustained economic growth even over the long term if it spurs significant technical
advancement(Herzer et al., 2008). the dependency theory stresses that although the injection
of capital and technologies by foreign investors can stimulate industrialisation and growth in
host countries, it can also heighten unemployment and income inequality (Girling, R. (1973).,
n.d.)

Hypothesis 5: Foreign Direct Investment is positively correlated with Economic

sustainability in SAARC countries.