How Does ESG Uncertainty Affect Green Finance: The Top ESG Performing Countries

Abstract

In light of the current climate crisis, sustainable development has become a strategic element of economic policies. This has led to the step of green finance instead of traditional financial methods, adopting an approach based on environmental, social, and governance (ESG) standards. In this context, this study examines the effects of environmental protection (ESG) on green finance. The analysis covers seven countries (Australia, Belgium, France, Germany, Ireland, Netherlands, and Sweden) that scored 85 points or higher in the ISESG 2025 global ESG ranking and covers the period 2002–2021. The cointegration test of Westerlund and Edgerton is utilized in the study. Long-term coefficients are then obtained through AMG and rCCE estimators. Green finance is measured by the share of environmental protection expenditures in GDP, while ESG uncertainty (ESGUI), inflation, and financial development are included in the model. The analysis results reveal a long-term relationship between the variables and significant heterogeneity among countries. The findings display that ESG uncertainty negatively affects green finance in Ireland and Sweden, but positively affects it in Belgium. Inflation has a negative impact on green finance only in Germany, while the supportive role of financial development is found in Ireland and the Netherlands. Therefore, analyses reveal that high ESG performance alone does not guarantee the stability of green finance, and that ESG uncertainty plays a decisive role in this process. This study is the first to directly examine the empirical relationship between country-based ESGUI and green finance, focusing on the group of countries with the highest ESG scores.