Green Economic Transition and Financial Policy: A Systematic Literature Review on Renewable Energy Investment in Developing Countries

Abstract

The transition toward a green economy has become a central agenda for developing countries seeking to reconcile economic growth with climate commitments, yet financing this transition remains constrained by limited fiscal space and underdeveloped capital markets. This study employs a library research (systematic literature review) approach to examine the role of financial policy instruments—specifically green bonds, carbon pricing, and blended finance—in accelerating the green economic transition and renewable energy investment in developing countries. Secondary data were collected from peer-reviewed journal articles, institutional reports, and policy documents published between 2018 and 2026, retrieved from Scopus-indexed sources and reputable institutional databases including the OECD, World Bank, and Climate Policy Initiative. The literature was analyzed thematically to identify recurring patterns, instrument effectiveness, and research gaps. The findings show that green bond markets have expanded rapidly but remain concentrated in developed economies; carbon pricing has been adopted cautiously in developing countries, with narrower coverage and lower rates than in OECD economies; and blended finance has emerged as a complementary mechanism specifically targeted at de-risking smaller-scale renewable energy projects overlooked by conventional green bond markets. Across all three instruments, developing countries face persistent structural barriers—weak regulatory frameworks, greenwashing risk, high transaction costs, limited institutional capacity, and continued fossil-fuel-oriented investment by state-owned enterprises—that keep them in what this study terms a "sub-investment-grade" trap. The review also identifies a scarcity of empirical evidence on the long-term macroeconomic impact and effective sequencing of these instruments in emerging economies. This study contributes a consolidated, cross-instrument synthesis of financial policy literature relevant to green transition in the Global South and offers directions for future empirical research and policy design.