Sustainable Finance and Credit Allocation in Emerging Markets

Abstract

This study examines the relationship between sustainable finance and credit allocation in emerging markets. The study employs an ex post facto research design, using panel data collected from selected emerging market economies over a specified period. Secondary data were sourced from international financial databases, including the World Bank and other financial reports. The data were analysed using descriptive statistics, correlation analysis, and panel regression techniques, including fixed effects and random effects models. Robustness tests were also conducted to ensure the reliability of the results. The empirical findings reveal that sustainable finance has a positive and statistically significant effect on credit allocation in emerging markets. The results suggest that financial institutions are increasingly considering sustainability factors when making lending decisions. In addition, ESG performance was found to significantly improve firms’ access to credit, suggesting that companies with stronger environmental, social and governance practices are more likely to obtain financing from banks. The study also found that economic growth has a positive influence on credit allocation, while inflation negatively affects lending activities. The study concludes that sustainable finance plays a crucial role in enhancing the efficiency of credit allocation and fostering sustainable economic development in emerging markets. The findings highlight the importance of strengthening sustainable finance policies, improving ESG disclosure standards, and maintaining macroeconomic stability to enhance the effectiveness of financial systems in supporting sustainable development. The study recommends that governments, financial regulators, and financial institutions promote sustainable finance frameworks and integrate ESG considerations into credit risk assessment models to encourage responsible investment and sustainable economic growth.