Digital finance speeds energy transition, but institutions and climate risks decide who benefits

Digital finance consistently pushes economies toward renewable energy, but whether that push succeeds depends heavily on the strength of institutions and on how climate risks play out locally, according to a new study published in Financial Innovation. The research, led by Huma Iftikhar, Luo Guang and Ningyu Qian, examines 148 countries along the Green Silk Road from 2004 to 2023, splitting the sample into 76 advanced and 72 emerging economies to compare how the same forces produce strikingly different results.

The study defines energy transformation as the shift from traditional energy sources to sustainable options such as solar, wind, hydro and biomass, measured as the ratio of renewable energy to total energy. The authors argue this transition is decisive for the sustainability of Green Silk Road economies, which they describe as currently struggling with climate change and energy crises. They note that almost 150 countries have signed cooperation agreements with China, and that China accounts for approximately 31.8 percent of global carbon emissions, making strategies to advance the energy transition in the region a pressing concern.

To capture digital finance, the researchers built a composite index from 12 indicators using principal component analysis, covering digital infrastructure, access, usage, digital literacy, digital governance and innovation capacity. These indicators included telecommunication infrastructure, the number of commercial banks, deposit accounts, ICT access and ATMs, outstanding deposits, internet use, the human capital index, environment-related technology patents, and online service and e-participation indices. Data came from the IMF, World Bank, United Nations, Global Innovation Index and OECD. Institutional policy stringency was similarly constructed from six governance measures drawn from the Worldwide Governance Indicators, while climate physical risk was measured using climate-related disaster frequency data from the IMF.

Methodologically, the paper relies on a two-step system GMM estimator as its main technique to address endogeneity, with seemingly unrelated regression as an alternate method and Driscoll-Kraay standard error regression as a robustness check. The authors also ran a battery of diagnostic tests, including slope homogeneity, Breusch-Pagan, Pesaran cross-sectional dependence and CADF unit root tests, and used the Westerlund panel cointegration test to confirm long-run relationships among the indicators. The panel comprised 1520 observations for advanced economies and 1440 for emerging economies.

The central finding is that digital finance positively influences energy transformation in both advanced and emerging economies. In the advanced-economy model, digital finance was positive at the 5 percent significance level with a coefficient of 0.017, and the result held across the alternate and robustness specifications. In emerging economies, digital finance was again positive and significant, supporting the hypothesis that digital finance promotes energy transformation through renewable energy adoption in both groups. The authors note this aligns with earlier studies of Chinese prefecture-level cities and listed energy firms that found positive associations between digital finance and energy transition.

The picture changes sharply when institutional policy stringency enters as a moderator. In advanced economies, institutional policy stringency strengthened energy transformation directly, with a coefficient of 0.018 at the 1 percent significance level, and the interaction between institutional policy stringency and digital finance was also positive at the 1 percent level. In emerging economies, by contrast, institutional policy stringency hindered energy transformation with a coefficient of -0.003, and the interaction term with digital finance was insignificant. The authors attribute this to weak enforcement capacity and regulatory fragmentation, which can limit institutions from translating digital finance into effective energy transformation. The marginal-effects plots reinforce this contrast: in advanced economies the effect of digital finance becomes more positive as institutional stringency rises, while in emerging economies the slope flattens and weakens.

Climate physical risks show an equally divided pattern. In advanced economies, the interaction between climate physical risk and digital finance was positive for energy transformation at the 5 percent significance level, and the marginal-effects plots show the effect of digital finance becoming more positive at higher levels of climate risk. In emerging economies, however, climate physical risks hindered energy transformation, and the interaction with digital finance was negative, with the plots showing the interaction declining more steeply at higher climate risks. The authors ground this asymmetry in climate change risk perception theory, arguing that heightened perceived climate risks increase societal, policy and investment demand for renewable systems, but that in emerging economies the interaction of digital finance and climate risk spillovers has disruptive and regressive effects.

The control variables add further texture. Low-carbon technology product trade and innovation linkages hindered energy transformation in advanced economies but supported it in emerging economies, where low-carbon technology product trade exerted a substantial positive influence at the 1 percent significance level. Research and development intensity supported energy transformation in advanced economies, with a coefficient of 0.045 at the 5 percent level, but showed a negative relationship in emerging economies. Income inequality encouraged energy transformation in advanced economies, while the authors note that in emerging economies higher income inequality hinders the transition because large low-income populations face affordability constraints, weak social protection and limited access to clean energy finance.

They suggest future research could incorporate different indicators for the digital finance index, apply quasi-experimental designs such as difference-in-differences around climate policy shocks, and explore nonlinear relationships once longer data series become available. The Hansen test statistics, ranging from 0.197 to 0.298 for advanced economies and 0.19 to 0.29 for emerging economies, indicated valid instruments, and the number of instruments remained below the number of groups in each sample.

For policymakers, the study’s implications are pointed. The authors argue that emerging economies need complementary improvements in regulatory quality, transparency, policy coordination, implementation capacity and enforcement mechanisms to make digital energy reforms effective, and that climate-related reforms must be carefully sequenced to avoid implementation burdens arising from weak financing and institutional capacity. They suggest governments of advanced Green Silk Road economies could offer transition finance to emerging economies to ensure resilience and sustainable energy transformations. Framed against the United Nations Sustainable Development Goals, the paper positions simultaneous progress in digital finance, institutional strength and climate action as the route to attaining energy transformation, particularly in emerging economies where the moderating forces currently work against the transition.

Subject of Research: The role of digital finance, institutional policy stringency and climate physical risks in energy transformation across Green Silk Road economies

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

Article References: Iftikhar, H., Guang, L., & Qian, N. (2026). Innovation bridging sustainability: the role of digital finance, institutional policy stringency, and climate physical risks for advancing energy transformation. Financial Innovation, 12(1), Article 160. https://doi.org/10.1186/s40854-026-00972-3

Image Credits: AI Generated

DOI: 10.1186/s40854-026-00972-3

Keywords: digital finance, energy transformation, renewable energy, Green Silk Road, institutional policy stringency, climate physical risks, SDG-7, two-step system GMM, advanced economies, emerging economies, low-carbon technology trade, income inequality