Green finance and its impact on business models in emerging markets: mechanisms, transformations, and challenges

Abstract

Green finance—the integration of environmental, social, and governance (ESG) criteria into financial systems—has emerged as a structural mechanism through which emerging market economies are beginning to realign capital flows with sustainability imperatives. Yet the pathways through which green finance instruments specifically reshape business models in developing economies remain incompletely theorized and unevenly evidenced in the existing literature. This review synthesizes empirical, institutional, and conceptual research on green finance published between 2016 and 2023 to examine three interconnected questions: how green finance mechanisms—including green bonds, sustainability-linked loans (SLLs), and carbon credit trading—operate in the emerging market context; how these instruments have catalyzed observable transformations in business model architecture across key emerging market regions and sectors; and what structural barriers constrain the scale and depth of green finance adoption in developing economies. The global green bond market reached approximately USD 650 billion in issuance in 2023, with emerging markets contributing approximately 20% of total volume. SLL issuance grew from USD 150 billion in 2019 to USD 500 billion in 2023, with the emerging market share expanding from 10% to 22% over the same period. ESG-integrated investment in emerging markets grew from USD 500 billion in 2019 to USD 1.8 trillion by 2023. Across these instruments, the evidence documents three principal business model transformation pathways: resource efficiency optimization driven by sustainability-linked financing conditions; renewable energy integration accelerated by green bond capital; and circular economy model adoption incentivized by ESG investment screening. Against these advances, three persistent structural barriers emerge: regulatory fragmentation and the absence of harmonized green taxonomies; limited institutional capacity and financial infrastructure in lower-income emerging economies; and underdeveloped domestic capital markets that restrict indigenous green finance scale-up. The review concludes with implications for policymakers, institutional investors, and corporate strategists, and identifies a research agenda addressing the macroeconomic effects of green finance, the role of financial technology in expanding access, and the underexplored social equity dimensions of green investment.