The Credit Boom That Green Growth May Not Survive

More people can borrow, save and use formal banking services than before. Whether that financial activity produces cleaner growth depends on a question that inclusion statistics rarely answer: what does the money fund? Credit can pay for an efficient factory upgrade, but it can also support production and consumption that use more energy and resources.

In "Does Financial Inclusion Foster Green Economic Growth? Evidence from High-Income Economies," published in Sustainability, Tiago Lopes Afonso and Daniela Soares Gonçalves examine that tension across 20 high-income economies from 2005 to 2021. They find that greater use and accessibility of finance is associated with lower economic output after selected environmental damage and resource depletion are deducted. The result does not show that borrowing causes environmental harm, but it gives policymakers reason to look beyond the number of people and businesses using financial services.

Access to finance tells only half the story

Financial inclusion is counted through the reach of formal services and the extent to which people and businesses use them. The two can move differently. More bank branches and cash machines may make services easier to obtain, while rising loans and deposits reveal how much financial activity is taking place. Neither measure identifies whether the money supports cleaner investment.

The study separates these dimensions rather than combining them into a single score. Its measure of use and accessibility draws on credit, outstanding loans and deposits; its availability measure draws on banking infrastructure. The authors then compare both with "green GDP" per person, calculated by deducting estimated carbon dioxide damage and selected natural-resource depletion from economic output.

Across the 20-country sample, greater use and accessibility of finance is consistently associated with lower green GDP in the study's principal analyses. An exploratory model estimates that a 1% increase in this financial measure is associated, on average, with roughly 0.104% lower green GDP. The estimate describes an association, not the environmental effect of issuing an additional loan.

The finding has a practical edge. A financial system can widen opportunity and still channel additional spending into activities that consume more energy or deplete resources. The authors suggest that pattern could help explain their result, but their data do not identify the destinations of individual loans. Whether credit financed cleaner equipment, conventional expansion or household consumption remains an open question.

More banking outlets do not settle the question

The study reaches a different, less certain result for the availability of financial services. Banking infrastructure has no statistically significant association with green GDP in the main panel model. A more flexible exploratory model detects a positive association, but that finding changes when individual countries are removed from the analysis. It offers a lead for further research rather than a firm case for expanding branches or cash machines as environmental policy.

Separating availability from use exposes a weakness in broad claims about financial inclusion. A newly accessible service may improve a person's economic options without immediately changing borrowing or investment. On the other hand, lending can grow substantially where banking infrastructure is already well established. Judging both developments by one composite inclusion score risks obscuring their different relationships with environmental outcomes.

The paper also examines globalisation, renewable energy consumption, green innovation and government effectiveness. Globalisation is positively associated with green GDP across the principal analyses, while the study's measure of green innovation shows a negative association. Renewable energy consumption is not statistically significant in the main panel model, although the exploratory model finds a negative relationship. Government effectiveness is not statistically significant in either.

Those results need precise reading. A negative association for green innovation does not show that environmentally related inventions harm the economy or the environment. Inventions may take time to be deployed, while energy demand and other economic changes may affect the same outcome.

Green finance needs evidence of where the money goes

The policy lesson is more demanding than simply increasing the supply of credit. Governments can pursue inclusion for its economic and social benefits while separately asking whether lending supports energy efficiency, cleaner production and investments that preserve natural resources. Financial regulators and lenders need information about the purposes of credit before they can judge whether financial expansion aligns with environmental goals.

This points to a gap in measurement as well as policy. The paper's financial indicators capture the scale of credit and deposits and the presence of service infrastructure, but do not reveal the environmental quality of the activities financed. Better information on lending by sector and purpose would allow researchers to test the authors' proposed explanation directly, and help policymakers assess which incentives produce measurable gains.

The implications extend beyond wealthy economies, but the estimates cannot simply be transferred to countries where many households and firms still lack formal finance. In those settings, initial access may be essential to economic security and productive investment. The question for governments and development agencies is how to preserve those benefits while steering new investment toward cleaner, more efficient activity.

What the findings can and cannot tell us

The negative link between financial use and green GDP is one of the study's more consistent results, though its cause remains uncertain. The authors measure how much finance is used, but cannot see whether loans paid for efficient equipment, energy-intensive production or everyday consumption.

The findings also reflect a particular group of countries and a particular definition of green growth. Data availability restricted the analysis to 20 high-income economies between 2005 and 2021. The green GDP measure deducts selected environmental damage and resource depletion from output, but does not capture every cost or benefit relevant to sustainable development. Results could differ with a wider sample, a longer period or another measure.

The study cannot establish that increased borrowing caused green GDP to fall. Changes in economic activity may themselves affect demand for finance, while other influences may shape both trends. Its mixed findings on banking availability and renewable energy reinforce the need to distinguish robust associations from results that depend on the analytical model used.

A useful next step is to examine where credit goes and what happens after it is spent. Lending for efficient buildings, cleaner industrial equipment and other activities could be assessed separately from lending that increases resource use. Until that evidence is available, the study's strongest policy message is: expanding financial access creates possibilities, but the environmental outcome depends on how those possibilities are used.