Institutional quality and financial development in the sustainable energy transition: Evidence from Latin America

The research analyzes how financial development and government effectiveness influence patterns of renewable energy adoption within a country's energy matrix. The study examines a sample of 16 Latin American countries based on 20 years of data (2002–2021). Using the two main variables, the Driscoll–Kraay estimator is applied; it is supplemented by complementary indices pertinent to governance and climate to facilitate a more comprehensive interpretation of the results and to integrate variable interactions to capture marginal effects. The direct results indicated that financial development has a significantly negative effect, as it does not, on its own, generate an investment pattern favoring renewable energy sources: meanwhile, governance effectiveness is shown to be statistically insignificant with respect to changes in the energy matrix. However, the results regarding the interaction between financial development and the complementary variable, climate readiness, indicate that the effect reverses once the interaction exceeds a threshold of +1.1 standard deviations (SD), turning positive at +1.2 SD. The dynamic between finance and governance interaction remains statistically insignificant. These results remain robust across tests employing various lag lengths and temporal segmentation. The study concludes that a transformation of the energy matrix, characterized by a greater share of renewable energy, is achievable when financial development aligns with investment planning facilitated by stable social, economic, and regulatory frameworks that enhance the capacity to channel financial resources into the execution of renewable energy projects. This result will help government entities, financial agents, and multilateral entities formulate and implement policies that are better aligned.