Measuring the impact of green finance on poverty reduction: Project of

an empirical method

BILJANA ILIĆ

Faculty of Project and Innovation Management "Petar Jovanovic", Belgrade

Educons University

Bozidara Jankovica Street, 14, Belgrade

SERBIA

SUNČICA STANKOVIĆ

Faculty of Business Economics and Entrepreneurship, Belgrade

Mitropolita Petra Street, 8, Belgrade

SERBIA

MILJANA BARJAKTAROVIĆ

Faculty of Business Economics and Entrepreneurship, Belgrade

Mitropolita Petra Street, 8, Belgrade

SERBIA

Abstract: - The paper aims to determine the impact of green finance on poverty reduction in selected countries

of the CEE region (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Poland, and Serbia), from 2016 to 2020.

Linear regression analysis was used to determine the impact. The results showed a significant positive impact of

the economic and financial green finance development dimensions on poverty reduction, while the impact of the

environmental dimension was significantly negative. In addition, based on the findings, green finance has a

significant and positive impact on poverty reduction. The paper points out that raising the degree of green finance

development can help reduce poverty.

Key-Words: -Consumption expenditure, Green finance, Inflation rate, Linear regression, Renewable energy,

Reduction poverty.

Received: July 22, 2023. Revised: November 29, 2023. Accepted: February 2, 2024. Published: April 3, 2024.

1 Introduction

Basically, the green economy implies bringing

ecology into all aspects of life, from basic elements

such environmentally friendly clothing to

environmentally friendly shoes and environmentally

friendly building materials, all of which are

components of stability. “Sustainability is

understood as a dynamic balance in the economic,

environmental and social spheres to meet all human

needs for all generations at all times” [1].

“Sustainainalism is a relatively new concept that has

gained widespread recognition and support in recent

years, and this trend is likely to continue” [2]. It is

critical to evaluate the benefits of implementing an

environmentally friendly economy, and by

implication sustainable finance, in humanity as well

as its many benefits to environmental protection,

ranging from increasing quality of life to creating

profits, as a means to reach the sustainability

criterion. Although humans are getting becoming

more mindful of a variety of environmental and

social concerns, habits haven't altered dramatically

[3]. The UN projects that expenditures in the energy

industry will top $300 billion over the course of

twenty years (by 2050), highlighting the need of

implementing environmentally friendly programs.

According to various projections, the green economy

could bring about among twenty and sixty-five

million additional jobs [4]. Currently, little over

fifteen million individuals engage in one of the

European Union's member states in professions that

are directly or indirectly related to the sustainable

International Journal of Applied Sciences & Development

DOI: 10.37394/232029.2024.3.3

Biljana Ilić, Sunčica Stanković, Miljana Barjaktarović

E-ISSN: 2945-0454

Volume 3, 2024

economy. Based to these data, every nation must

provide the circumstances for the expansion of the

sustainable economy and sustainable finance, since

these ideas will become a requirement instead of an

option in the years to come [5]. It is the producer's

obligation to incorporate the expenses of resource

usage into the total price of manufacturing by pricing

natural resources that are renewable, regardless of

how this affects earnings slightly. The term "green

economy" originated in the late 1980s that relates to

the conservation of the environment in all aspects of

human growth. It gradually gained significance,

particularly in the 2030 Strategy for a Sustainable

Development. Meeting the agreed Sustainable Goals,

that seek to encourage decent job opportunities, an

economy that is equitable, and other features that

might contribute to an improved society, is critical

for many financially developing nations [6]. The

green economy is a step forward because it is an

achievable and flexible method that may assist to

achieve sustainable growth in all of its elements,

including preservation of the environment through

reusing and its beneficial effects on hiring and

poverty reduction (via job creation) [7]. The

environmentally friendly economy should not be a

barrier to financial growth, instead being a fresh

motivation, a source of high-quality employment

opportunities, and an important weapon in the battle

against inequality. Many academics, practitioners,

and policymakers have advocated for sustainable

development through debates regarding the

disagreements between the environment and

economic expansion, in addition to the three primary

elements that make up sustainable development -

preservation of the environment, inclusion in society,

and economic expansion - and the five principles -

people, prosperity, planet, partnership, and peace -

which are central to the 2030 Agenda [8]. Yet there

are additionally assertions that improving the

economy may not only result in a fall in revenue but

also fail to reduce unemployed people, notably

because the goals of sustainable development and

economic growth are contradictory[10].

In the opinion of Jiang et al [11], there is a dearth

of research into the connection between financial

growth and poverty elimination. The contributors of

this article wished to undertake an identical research

project for the same objective. The study aims to

assess the influence of green money on poverty

alleviation. As a result, the purpose of this study is to

look at how green financing influences poverty

reduction in six CEE countries (Albania, Bosnia and

Herzegovina, Bulgaria, Croatia, Poland, and Serbia).

To do credit to the purpose of the study, the thesis

was created such that after the opening presentation,

in which the object and aim of the research were

defined, the research technique is detailed in the

second portion. The third section covers the study's

results and an examination of the findings. The last

section of the paper discusses the major results of the

study and practical consequences, highlights some

limits, and gives recommendations for further

research on this issue.

1.1 Literature review

The United Nations Environment Programme

(UNEP) describes environmentally friendly finance

as a rise in cash flows (from financial institutions,

micro lending, insurance, and expenditures from the

public, private, and non-profit sectors) that are

consistent with the objectives of the Sustainable

Development Goals [12]. The main aim is to more

effectively manage social and environmental hazards

by capturing opportunities that provide high rewards,

environmental benefits, and improved responsibility

[13]. Simply expressed, sustainable finance is the use

of current capital markets to create and distribute a

wide range of financial products and services that

make refunds, are investable, and have a beneficial

environmental impact. To encourage ecologically

good investments while discouraging

environmentally detrimental ones, environmental

externalities must be internalized and risk

perceptions changed. Green finance can be preferred

over traditional investments that contribute to

harmful patterns of growth by promoting green

financing on a large and financially viable scale. The

emphasis might be on greening existing

infrastructure investments or encouraging new

investments in critical sectors such as renewable

energy, environmentally friendly transportation,

managing natural resources, the environment,

sustainable tourism, ecosystem services, and

pollution prevention and control. To accommodate

the increased demand, fresh financial entities such as

green banking institutions and environmental funds,

as well as new financial products including carbon

trading instruments and green debt, are being

developed. These organizations and tools serve as

green finance in their totality. Green finance can be

supported through increased investment in clean and

green technologies, changes to national regulations,

integrated public financial incentives, more green

financing from various sectors, funding for an

environmentally friendly economy that is based on

natural resources, and a low-carbon economy. The

assessment of sustainable finance is a major problem,

as evidenced by the related research. A review of the

literature in this field reveals that some research

International Journal of Applied Sciences & Development

DOI: 10.37394/232029.2024.3.3

Biljana Ilić, Sunčica Stanković, Miljana Barjaktarović

E-ISSN: 2945-0454

Volume 3, 2024

assess the green finance index [14]; others replace

additional indicators [15]; and a third study

investigates the global structure using sophisticated

network architectures [16][17]. Jiang et al. [11], for

example, employ the entropy weighting approach to

evaluate the growth of green financing in 25 Chinese

provinces and districts. The scholars cited above

underline the relevance of all three elements of

sustainable finance (financial, monetary, and

environmental) in developing green economy

indicators. It may be stated that there are now

insufficient criteria to allow effective monitoring of

the growth of green financing, which may make it

hard to adopt appropriate legislation. When

investigating the impact on environmental finance,

however, researchers adopt two approaches. The first

line of study investigates how certain variables have

influenced green finance [11][18-22], whereas the

second line of research investigates how green

money has impacted certain factors [16][23].

The financial system is crucial to economic growth

because it enables a large number of financial

transactions [24]. Poverty alleviation is an important

concern for all nations, particularly growing

economies, and international agencies like the World

Bank and the International Monetary Fund have

included reducing poverty goals into the majority of

their development initiatives [25]. In accordance with

theoretical terms, there are two manners in which

financial advancement might effect poverty. The first

approach demonstrates how economic growth

impacts poverty by increasing the availability of

banking services for the poor [26][27]. The second

approach contends that when the banking sector

boosts levels of investment, it indirectly decreases

poverty by increasing economic growth [28].

Previous study appears to be predicated on the

implicit notion that poverty naturally reduces as

financial development fosters growth. However,

some say that financial development leads to crises in

finance and an unstable socioeconomic surroundings,

both of which are detrimental to the poor [15][29].

Previous study appears to be predicated on the

implicit idea that as financial development

accelerates growth, poverty would inevitably decline.

However, some contend that financial progress is

linked to crises in finance and a volatile

socioeconomic surroundings, the two of which are

detrimental to those in poverty [30]. On the whole,

theoretically poverty analysis indicates a somewhat

ambiguous link between economic expansion and

poverty alleviation. A survey of the relevant literature

finds that only a few articles, including Jiang et al

[11] and Hafner et al [15], investigate the link

between green financing and poverty alleviation.

According to the authors (Jiang and Hafner), there is

a good relationship between green financing and

poverty reduction. However, as previously stated,

there are additional studies looking into the

connection among economic growth and poverty

alleviation, with certain academics reaching various

conclusions about the effect of monetary growth on

lowering poverty rates based on the sort of example

and statistical techniques used. One set of academics

emphasizes the beneficial effects of economic growth

on poverty alleviation [31][32]. Another set of

research suggests a negative correlation between

economic growth and poverty alleviation [33][34].

The third set of experts suggests a nonlinear

correlation among economic growth and poverty

alleviation [35][36]. Furthermore, Claessens and

Perotti [37] and Naceur and Zhang [38] argue that

financial progress may have a detrimental influence

on poverty alleviation. As a result, there is no

consensus among academics on how economic

growth helps alleviate poverty, and there is little

research to determine how sustainable finance could

affect the decrease in poverty.

2 Problem Formulation

The paper used a similar method to the Jiang et al.

[11] method. In the first step, the mentioned authors

calculate the green finance development indicator,

and in the second step, they measure the impact of

that development on poverty reduction. The indicator

of the development of green finance is considered in

the paper as a multidimensional construction, which

includes economic, financial, and environmental

dimensions. For the configuration of the green

finance development indicator, seven indicators were

used, namely two indicators for economics, three

indicators for financial, and two indicators for the

environment. For comparability, the data was

standardized using the Z-score method. The green

economy indicator is calculated as the arithmetic

mean of the mentioned three dimensions of green

finance development. This methodology was also

used in earlier research on the green economy and

related concepts [39-42]. For research purposes, data

from various sources were used. Dimensions,

indicators, attributes, and data sources are shown in

Table 1. The dependent variable in the model is the

poverty level. Due to the availability of data, for the

observed group of countries i.e. selected countries of

the Central and Eastern Europe (CEE) region:

International Journal of Applied Sciences & Development

DOI: 10.37394/232029.2024.3.3

Biljana Ilić, Sunčica Stanković, Miljana Barjaktarović

E-ISSN: 2945-0454

Volume 3, 2024

Albania, Bosnia and Herzegovina, Bulgaria, Croatia,

Serbia, and Poland), the indicator households and

Non-Profit Institutions Serving Households

(NPISHs). Final consumption expenditure per capita

was used as a proxy for the poverty level variable.

The independent variables in the first model are the

economic, financial, and environmental protection

dimensions, and in the second model the indicator of

the development of green finance. Due to the

availability of data, the selection of data refers to the

period 2016 - 2020. The total number of observations

is 30.

Table 1. Description of research variables,

attributes, and data sources

Dimension

Indicator

Attri

butes

Source

Economics

GDP per capita

(current US$)

The

World

Bank

Inflation rate

World

Data.info

Finance

Number of

banks

Raiffisen

research

(2020);

Delloite

(2022)

Loans

Deposits

Environme

Renewable

energy

consumption

(% of total final

energy

consumption)/(

Loans +

Deposits)

The

World

Bank

CO2 emissions

(metrics tons

per

capita)/(Loans

+ Deposits)

The

World

Bank

Poverty

reduction

Households

and NPISHs

Final

consumption

expenditure per

capita

(constant 2015

US$)

The

World

Bank

Source: The World Bank, Raiffeisen research

The descriptive statistics for the research's variables

are displayed in Table 2. The largest dispersion of

results was recorded in the variable number of banks,

and the smallest in the consumption expenditure.

The mean value of variable loans is 53.0567,

variable deposits 66.2667, variable GDP 10.006.7,

inflation rate 1.9670, renewable energy consumption

26.0770, CO2 emission 5.5367, and variable

consumption expenditure around 5.477. More

detailed information is shown in Table 2.

Table 2. Descriptive statistics

Variable

Min.

Max.

Mean

Std.

Deviant

Loans

31.6

82.20

53.0567

11.9071

Deposits

41.7

88.60

66.2667

14.3786

GDP

4.53

18.000

10.006,7

4.43242

Inflation

-1.05

5.06

1.9670

1.18447

Renew.

energy

consume.

11.1

44.58

26.0770

9.62027

CO2

emission

1.50

8.20

5.5367

2.09655

Consume.

Expend.

3.26

8.8190

5.47703

1.94541

Source: authors research

Multiple linear regression was used to determine

the impact of green finance development dimensions

on poverty reduction, in the form (equation 1):



          

     (1)

where: 

 – dependent variable (poverty

reduction),  – constant,  – coefficient for the

corresponding independent variables: - economic

dimension, - financial dimension,  -

environmental dimension, .i. – deviation from the

functional relationship;  – sample size.

Simple linear regression was used to determine

the impact of green finance development indicators

on poverty reduction, in the form (equation 2):



      (2)

where: 

 – i-th dependent variable (poverty

reduction), α, β - unknown parameters are called

regression parameters, - independent variable

(green finance development indicator).

3 Problem Solution – Empirical results

and discussion

The findings, presented in Table 3, indicate that the

observed group of countries’ progress in green

finance during the observation period from 2016 to

2020 has been inconsistent. With a positive average

value for the study period of 0.86, Croatia had the

International Journal of Applied Sciences & Development

DOI: 10.37394/232029.2024.3.3

Biljana Ilić, Sunčica Stanković, Miljana Barjaktarović

E-ISSN: 2945-0454

Volume 3, 2024

best performance, followed by Bulgaria (0.38) and

Poland (0.32). Serbia (-0.65), Albania (-0.55), and

Bosnia and Herzegovina (-0.3) all had negative mean

values for the observed indicator. Notably, the EU

member states achieved better performance of the

observed indicator, compared to non-EU states.

These results are not shocking, considering that the

EU's member states have (mostly) stronger

economies than less developed nations like Serbia,

Albania, and Bosnia and Herzegovina, which allows

the economy stronger countries to participate in

sustainable development for longer.

Table 3. Indicator of the development of green

finance, for the observed group of countries, in the

period 2016-2020

Country

2016

201

202

Albania

-.39

-.32

-.52

-.86

-.68

Bosnia and

Herzegovi

-.40

-.31

-.34

-.47

.02

Bulgaria

.35

.43

.41

.24

.48

Croatia

1.12

1.01

.69

.53

.95

Poland

.03

.13

.32

.70

Serbia

-.64

-.75

-.80

-.77

-.30

Source: authors research

Multiple linear regression was used to determine the

impact of each of the dimensions of green finance

development indicators. The dependent variables in

the model are the economic, social, and

environmental dimensions of the green finance

indicator, and the independent variables are the

logarithmic value of consumption expenditure.

According to the value of the coefficient of

determination (Adj. R2), the first model explained

about 48% of the dependent variable, the second

model about 73%, and the third model about 81% of

the dependent variable. In addition, the values of the

F statistic indicate the significance of all three models

(p < 0.05).

Table 4. Multiple regression results

Variable

Model 1

Model

Model 3

Economics

.705(5.255

)***

.503

(4.841)

***

.300 (-

2.795)**

Finance

.542

(5.214)

***

.729(5.635

)***

Environm

ent

-.619(-

3.355)***

Adj. R2

.479

.731

.805

27.616

40.316

40.838

Note: *** - p < 0.01; ** - p < 0.05

Source: authors research

The results of multiple linear regression (Table 4)

show that all three dimensions of green finance

development indicators are significant determinants

of poverty reduction. Namely, the economic and

financial dimensions significantly and positively

influence poverty reduction, while the impact of the

environmental dimension is also statistically

significant, but negative. The obtained findings

cannot be compared with the findings of other

studies, because, as far as the authors are aware,

based on the review of the relevant literature, other

studies did not deal with issues of the relationship

between poverty reduction and green finance

development indicators at a dimensional level.

The impact of green finance development indicators

on poverty reduction was examined using simple

linear regression. The dependent variable in the

model is the logarithmic value of consumption

expenditure, and the independent is an indicator of

the development of green finance. According to the

value of the coefficient of determination (Adj. R2),

the model explained about 54% of the dependent

variable. In addition, the values of the F statistic

indicate the significance of the model (p < 0.05).

Table 5. Simple linear regression results

Variable

Adj.

Green

finance

development

indicator

.543

35.463***

.748

5.955***

Note: *** - p < 0.01

Source: authors research

The results of the linear regression (Table 5)

indicate a statistically significant positive impact of

indicators of green finance development on poverty

reduction (β = 0.748; p < 0.05). The observed results

of the authors are consistent with those of the study

by Jiang et al. [10], who found a strong and positive

link between the development of green finance and

the reduction of poverty.

4 Conclusion

The paper aimed to determine the impact of green

finance development indicators on poverty reduction

in selected countries of the CEE region, in the period

International Journal of Applied Sciences & Development

DOI: 10.37394/232029.2024.3.3

Biljana Ilić, Sunčica Stanković, Miljana Barjaktarović

E-ISSN: 2945-0454

Volume 3, 2024

from 2016-2020. For the research, an indicator of the

development of the green economy was constructed.

Based on the value of the obtained indicator, it can be

concluded that the development of green finance in

the observed group of countries is uneven, with

Croatia having the best score, while Serbia is in last

place. The obtained results indicate that the economic

and financial dimensions have a statistically

significant and positive impact on poverty reduction,

while the impact of the environmental dimension is

significant and negative. In addition, the results

showed that the green economy development

indicator has a significant positive impact on poverty

reduction.

Since the research results indicate a positive and

significant relationship between the level of green

finance development and poverty reduction, which

means that higher levels of green finance lead to

greater poverty reduction, financial institutions

should work to further develop financial innovations,

such as green loans or green finance bonds.

Empirically, this study contributes to existing

knowledge related to the measurement of green

finance development and the relationship between

dimensions of green finance development indicators

and poverty reduction.

The lack of current data, which makes it

impossible to examine recent performance and trends

in the advancement of the green finance development

indicator, is a limitation of the current study. In this

sense, further research on this topic is needed, which

would include more recent data, but also more

indicators of the development of green finance, such

as green credits, green insurance, or green securities.

Additionally, the current research covers only

selected countries in the CEE region, while future

research could cover more countries, both developing

and developed and compare their results with the

results of the current research. By examining specific

green finance laws and actions at the level of

individual countries, as well as closely monitoring

the performance of green finance over time, more

analysis can be conducted in this area to determine

the precise causes of observed disparities between

countries.

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