Green finance and environmental sustainability: evaluating the role of urbanization, energy, and institutional quality in Asia’s low-carbon transition

Asia is a fast-growing emerging market with investment potential, making it essential to investigate the mechanisms by which green finance influences environmental sustainability. For the empirical analysis using data from 2000 to 2022 on twenty-two Asian economies, we applied the fixed- and random-effects model. First, we have verified the model’s feasibility and employed diagnostic tests and robustness, which show that the model is appropriate. The key findings of the fixed effect model, suggested by the Hausman test, indicate that there is a negative association between Green Finance and CO₂ emissions. The green finance coefficient is − 0.0107, which implies that a 1% increase in green finance leads to a reduction in carbon emissions by 0.0107%. Likewise, population density exhibits a negative relationship with CO₂ emissions. The coefficient of population density is − 0.5373, implying that a 1% increase in population density diminishes carbon emissions by 0.5373%, which supports the ecological efficiency theory. The Causality test shows unidirectional causality among the variables. Based on evidence, this study suggests that policymakers of the Asian economies should focus on green finance initiatives to support environmentally sustainable investments, which leads to a decline in CO₂ emissions.