Climate finance, country governance and environmental sustainability: new global evidence

Purpose This study aims to investigate the impact of country governance on climate finance (CF), emphasizing its role as a moderating factor in achieving environmental sustainability through CF. Design/methodology/approach This study uses system generalized method of moments (GMM) to analyze how country governance impacts CF in recipient countries, using a sample of 127 nations from 2000 to 2020. A heterogeneity analysis is conducted, focusing on Small Island Developing States (SIDs), non-SIDS and non-BRICS countries, supplemented by six cross-regional analyses as a robustness check. In addition, the research investigates the moderating role of country governance on the relationship between CF flows and environmental sustainability. Findings The results indicate that better country governance reduces the adverse effect on CF and environmental sustainability. Furthermore, it revealed that recipient countries with strong voice and accountability and government effectiveness are better positioned to counteract the potential negative effects of CF. However, the impact varies across SIDs, non-SIDs and non-BRICS nations. In addition, countries with higher levels of voice and accountability and political stability play a crucial role in ensuring that CF is effectively directed toward achieving environmental sustainability. Practical implications Policymakers should prioritize improving transparency, regulatory quality and administrative capacity to ensure climate funds are allocated and implemented efficiently. Donor agencies can also use governance indicators to assess institutional readiness and tailor funding strategies accordingly. Originality/value This study expands the literature by presenting global evidence on the influence of country governance on climate mitigation and adaptation finance. It highlights governance as a moderating factor in the link between environmental sustainability and CF.