Innovation bridging sustainability: the role of digital finance, institutional policy stringency, and climate physical risks for advancing energy transformation

Transitioning to low-carbon sources is decisive for the sustainability of Green Silk Road economies, which are currently struggling with climate change and energy crises. This paper investigates the role of digital finance in advancing energy transformation across Green Silk Road economies, with a comparative focus on 76 advanced and 72 emerging economies from 2004 to 2023. It further examines whether institutional policy stringency and climate physical risks moderate the nexus between digital finance and energy transformation. Principal component analysis (PCA) was employed to construct composite indices of digital finance and institutional policy stringency. Methodologically, the paper employs a two-step system GMM, Seemingly Unrelated Regression, and Driscoll-Kraay standard error regression as the main, alternate, and robust methods to address endogeneity, cross-sectional dependence, and heterogeneity concerns. The outcomes reveal that digital finance positively influences energy transformation. Institutional policy stringency strengthens the positive effect of digital finance on energy transformation in advanced economies but remains insignificant in emerging economies, reflecting structural and institutional disparities. Climate physical risks encourage energy transformation in advanced economies but hinder it in emerging economies. The paper incorporates innovation linkages, low-carbon technology product trade, income inequality, and research and development intensity as control factors. Our findings encourage managers, financial analysts, legislators, and governments to attain energy transformation (SDG-7) through simultaneous progress in contemporary digital finance (SDG-9), institutional strength (SDG-16), and climate actions (SDG-13), particularly in emerging economies.