When regulation shapes green finance: Evidence from OECD active issuers

Because of escalating climate risks and fiscal pressure, governments face a policy challenge concerning when environmental regulations stimulate sovereign green finance, and when they reduce reliance on it. This study examines the relationship between environmental policy stringency and issuance of government green bonds (GGB) by active issuers in member countries of the Organization for Economic Cooperation and Development (OECD) from 2015 to 2024. Unlike prior studies that view green finance as a market-driven response, this study treats environmental policy stringency and GGB issuance as different macro-level policy instruments in the green-transition policy mix. To address concerns about endogeneity and observable selection, the study employs two-stage least squares and entropy balancing. The baseline results reveal a negative relationship between the environmental policy stringency index (EPSI) and GGB issuance. This finding is framed as consistent with a regulatory–financing substitution channel, rather than direct evidence that regulation has achieved environmental outcomes. Because EPSI measures policy strictness, rather than actual environmental outcomes, the substitution argument is presented as a possible policy mix explanation, instead of direct proof. The moderation analysis shows that political participation weakens the negative EPSI–GGB relationship, which suggests that public engagement, accountability, and policy responsiveness can make governments less likely to rely on regulation alone and more likely to maintain overt green-financing activity. The heterogeneity analysis shows that the negative relationship is stronger in economies with lower pollution levels and higher fiscal pressure, where environmental and debt-capacity conditions might limit additional labeled borrowing. The study extends policy instrument and policy mix theory by showing that regulation and sovereign green finance do not automatically act as complementary instruments; instead, GGB issuance emerges as a conditional financing response shaped by regulatory stringency, political participation, fiscal capacity, pollution conditions, and the broader policy mix.