Do Market Institutions Promote Green Finance? The Moderating Role of Generalized Trust

Abstract

In the context of the global transition to a low-carbon economy, green finance is becoming a key tool for achieving sustainable development goals. However, the dynamics of the green bond market vary significantly across countries, driven not only by economic but also by institutional and sociocultural factors. This issue is particularly acute in emerging economies and the BRICS bloc, where institutional heterogeneity limits the scaling of sustainable investments. This study examines the impact of capitalist system types and the level of interpersonal trust on green bond issuance volumes. Using panel data for 21 countries from 2017 to 2023, we analyze how the type of capitalist system and the level of interpersonal trust affect green bond emissions. The type of capitalism is defined through principal components (PCA1 and PCA2), constructed based on probabilistic weights of countries’ affiliation with market, Scandinavian, continental, and Asian models. Interpersonal trust is measured as the share of respondents who answered positively to the World Values Survey question regarding whether most people can be trusted. Using a random-effects panel regression model, we establish that the impact of the market institutional component (PCA1) on green bond issuance is not direct but varies depending on the level of interpersonal trust. The results show that at low levels of trust (below 23–24 percentage points), the relationship between PCA1 and green bond issuance is negative. Above this threshold, the effect of PCA1 becomes positive. At the sample mean level of trust (44 percentage points) and higher, the market institutional environment acts as a catalyst for green finance development. The paper shows the nonlinear influence of the capitalist model on the issuance of green bonds, suggests measuring the institutional structure of the economy through its main components, and confirms the crucial role of interpersonal trust in the development of green finance. The findings confirm that the successful launch of environmental projects in BRICS countries depends on a combination of developed formal institutions and a high level of interpersonal trust.