“Financial policymakers and regulators may not necessarily be involved in the planning and implementation of mitigation measures at the national level. However, they play an important role in mitigating the impacts of extreme economic shocks from disaster events on the financial system, and in channelling resources to efforts that build resilience. This requires understanding and estimating these impacts.”

AFI Special Report—Disaster resilience through financial inclusion: The role of financial regulators in disaster risk reduction, February 2021.

Advancing the green or sustainable finance agenda has gained global attention as aside from COVID-19 recovery, many economies have also battled with ongoing climate change risks. The pace and scale of transitioning towards a sustainable or greener economy vastly differ by country and region.

Global investment requirements for addressing climate change are estimated in trillion US dollars, with investments in infrastructure alone requiring about $6 trillion per year up to 2030 (OECD, 2017). At the 26th United Nations Climate Change Conference of Parties (COP 26) that was held in Glasgow in 2021, world leaders recognised the centrality of sustainable recovery from COVID-19 and solidarity with vulnerable parties in global efforts to tackle climate change.  While countries have reaffirmed their ongoing commitment to key principles from the Paris Agreement (PA) and previous COPs such as limiting global temperature rises to 1.5 degrees, it was noted that long-term finance pledged by developed countries which were originally set at US$100 billion per year to deliver the goals of the PA by 2020 (next timeline will be by 2025) have not been met.

Small Island Developing States (SIDS) such as Fiji remain the most vulnerable to the effects of climate change and recurring natural disasters. Hence many SIDS have made strong commitments towards climate action by enhancing their nationally determined contributions (NDCs) and setting ambitious long-term low-emission development strategies. According to the Fiji Sovereign Green Bond Impact Report 2018, Fiji will need an additional FJ$9.3 billion by 2028 to strengthen resilience to climate change.  Similarly, in Fiji’s NDC Implementation Roadmap which strives to eliminate 627,000 tonnes of CO2 emissions annually by 2030, strategic investments in energy supply, energy demand and transportation sector will cost approximately FJ$6 billion.

Against this backdrop, it is of interest to explore the major determinants of green finance in SIDS such as Fiji. To test this, we utilise the time series Vector Error Correction Model on four macroeconomic indicators, namely; gross domestic product, capital formation, mineral fuel prices and interest rates. 

Photo credit: United Nations and Fiji National Disaster Management Office


Time series data used in this study between the years 1990 and 2020 are sourced from the World Development Indicators (technological progress and innovation proxied by investment-gross fixed capital formation) and the Reserve Bank of Fiji Annual/Quarterly Reports (green finance proxied by Total Renewable Energy Investment, commercial bank and Government lending to renewable energy projects), Real Gross Domestic Product, interest rate and mineral fuel prices.


The findings from this study show a unidirectional relationship amongst the independent variables in the short run (GDP impacts mineral fuel prices, subsequently capital formation and mineral fuel prices influence interest rates) as indicated by the Granger-cause results.

Taking into account a long-term relationship, mineral fuel price moves negatively towards green finance or investment in renewable energy. That is, the increase in mineral fuel prices does not necessarily stir the demand for green finance or investment in renewable energy in the long run.

The negative correlation between fuel price and investment in renewable energy could very well support the evolution of the correlation between crude oil and renewable energy (Bonaire, 2015). That is, the case where crude oil and renewable energy are not direct substitutes, and therefore when the price of one increases, the demand for the other does not also increase. Since Fiji is still heavily reliant on crude oil for its infrastructure, transport and public utilities, the increase in oil prices will not necessarily stir the demand for sustainable/green finance or investment in renewable energy.

Policy implications

Given the important role that green finance plays in enhancing sustainable development and economic growth, some policy suggestions can focus on the following areas:

  1. The financial sector will need to play a key role in scaling up sustainable/green finance via market forces and financial governance to ensure that financial firms seriously consider the threats posed by climate change and integrate risks into their lending and investment frameworks.
  2. Incentivise the financial sector and embed climate risk in financing and investing decisions—include regulatory and prudential incentives on capital or liquidity requirements such as carbon or pollution tax or levies. This will have flow-on effects for financial monetary and financial stability.
  3. There is a distinct need for intensive capacity building amongst regulators and LFIs /relevant stakeholders to lead and inform the green finance policy development process.
  4. Leverage digital financial services to promote green financial products through product innovation involving the development and implementation of novel solutions to enhance the mobilisation of finance towards sustainable development needs.
  5. Undertake a diagnostic study covering key economic sectors in Fiji to evaluate which sectors are commercially viable for green finance in Fiji. Also, source projects/initiatives that are currently underway from other donor and development agencies regarding climate change and SDGs to minimise resources through concerted efforts.
  6. Lessons from capacity building and diagnostic study should be incorporated into the development of policies as well as viable products and services that will be tailored to Fiji’s needs on green finance.
  7. Private-public partnerships can also be explored to strengthen the design of new financial instruments and improve the bankability of sustainable/green projects through the mitigation of risk and information asymmetries.


Latu Sera Kaukilakeba is a Senior Analyst at the Reserve Bank of Fiji and Associate Professor Tarlok Singh is a member of the Griffith Asia Institute.

This article is a summarised version of the Pacific Island Centre for Development and Policy Research Joint Policy Research Working Paper JPRWP#22 Exploring determinants of green finance in small island economies—case of Fiji.