Evaluating the Role of Green Bonds as a Tool for Financing the Transition Toward a Low-Carbon Economy and Achieving banking Sustainability

This study investigates the causal impact of green bond issuance on banking sustainability and its contribution to financing the transition toward a low-carbon economy. The research problem arises from the lack of clear empirical evidence on whether green bond issuance merely reflects pre-existing sustainability orientation or actively improves banks' ESG performance. Using a global panel dataset covering approximately 113 banks and 1,243 bank-year observations during 2015-2025, the study employs a Dynamic Panel Data (DPD) framework and an Instrumental Variables Two-Stage Least Squares (IV-2SLS) estimator to address endogeneity, reverse causality, dynamic persistence, and unobserved heterogeneity. ESG data were obtained from Refinitiv Eikon, while green bond issuance, GDP per capita, and CO₂ emissions data were collected from World Bank databases. The results indicate that green bond issuance has a positive and statistically significant causal effect on banking ESG performance. The findings also show that bank size and profitability improve sustainability performance, while higher country-level CO₂ emissions are negatively associated with bank ESG scores. The study recommends strengthening green bond disclosure, external verification, and regulatory incentives to support sustainable banking and the low-carbon transition