Does green finance moderate the impact of geopolitical risk on environmental sustainability? Evidence from G7 economies

This study examines the relationship between geopolitical risk, green finance, and environmental quality in G7 countries over the period 1990–2020. Recognizing green finance as a key policy instrument supporting the ecological transition, the paper investigates both the direct effects of geopolitical risk and green finance on CO₂ emissions, as well as the extent to which green finance conditions the environmental consequences of geopolitical tensions. Using advanced econometric techniques—including the cross-sectionally augmented autoregressive distributed lag (CS-ARDL) model, feasible generalized least squares (FGLS), System-GMM estimation, and panel causality tests—the results show that geopolitical risk significantly increases CO₂ emissions, with a strong short-run effect that remains positive, though weaker, in the long run. Green finance exhibits a weak and statistically insignificant short-run effect on emissions, but its impact becomes significantly negative in the long run, reflecting the gradual benefits of technological development, renewable energy investment, and structural energy transition. Moreover, the interaction results indicate that higher levels of green finance reduce the long-run sensitivity of CO₂ emissions to geopolitical risk, suggesting that sustained green financial support can moderate the environmental consequences of geopolitical instability. A series of robustness checks confirm the stability and reliability of these findings. These results highlight the importance of stable green investment frameworks and coordinated climate policies to strengthen environmental resilience under conditions of geopolitical uncertainty.