Artificial Intelligence and Green Finance: Unveiling the Link to Financial Performance in Pakistan

Abstract

This paper examines the effectiveness of artificial intelligence (AI) adoption and green finance, as well as their impact on the financial performance of firms in the green finance sector in Pakistan over the period 2014-2023. As more people become globally aware of sustainability and the environment, green finance, facilitated by AI, can transform the process of making financial decisions to build investment portfolios. The study examined the impact of AI-driven methods in green finance (i.e., green bond issuance, Regularity strength, ESG incorporation, and carbon footprint reduction) on financial performance metrics. Financial performance is measured by Return on Assets (ROA). Based on the information collected with the assistance of financial institutions in Pakistan, the researcher employed the Generalized Method of Moments (GMM) estimation approach to address potential endogeneity problems. The results suggest that the adoption of AI, strength of regulation, the issuance of green bonds, and ESG scores has a positive and significant effects on financial performance, and the strength of regulatory presence enhances the positive effect of AI. These findings suggest a greater relevance of AI in enhancing the financial performance of institutions that adhere to the principles of sustainable finance, as well as in achieving the overall objective of environmental sustainability. The study has important implications for policymakers, investment companies, and financial institutions that seek to incorporate AI technology into their green finance plans to develop more effective financial and environmental solutions.