Linking Green Finance and Financial Investment to Investment Efficiency: Evidence from Indonesia

Abstract

This study investigates the dynamic relationship between green finance, financial investment, and investment efficiency in Indonesia using the Vector Auto Regression (VAR) approach. As the country intensifies its commitment to sustainable development, understanding how financial systems respond to green financing mechanisms becomes increasingly important. The analysis utilizes quarterly data on green finance indicators, private financial investment, and investment efficiency from 2012 to 2023. The VAR model enables an examination of short- and long-term interdependencies among the variables. Empirical findings reveal that green finance significantly influences investment efficiency, both directly and through its interaction with financial investment. Moreover, financial investment demonstrates a delayed but positive effect on improving capital allocation efficiency. Impulse response functions indicate that shocks in green finance lead to sustained improvements in investment efficiency, while variance decomposition confirms the dominant role of green financial instruments in shaping long-term investment outcomes. These results provide important implications for policymakers aiming to align financial sector reform with green growth strategies.