Green finance, fossil energy, and institutional factors in the context of sustainable development

Given the importance of the global issues of climate change and environmental pollution in sustainable development, this study aims to investigate whether there is a connection among green finance, fossil energy, and institutional factors, considering the significance of a transition to renewable clean energy from fossil energy in sustainable development. For this purpose, the effects of fossil energy on the S&P green bonds are compared by considering and ignoring institutional quality as an interaction term in various oil shocks, using the threshold structural vector autoregression (TSVAR) technique for the US in 2012–2019. The findings indicate that the sensitivity of green bonds to oil shocks is limited to short-term periods. Institutional factors make this sensitivity more persistent, extending into the medium and long term. These results highlight the significance of institutional quality in the development of green bonds, especially when the oil market and the large amount of money circulating into it create grounds for corruption, the role of administrative integrity, legal structures, and government policies becomes more prominent. Hence, the integrity and quality of institutional factors, which includes corruption incentives, democratic accountability, government stability, bureaucracy as well as law and orders, should be taken into account in policymaking.