The Non-Linear Impact of Financial Development on Environmental Quality and Sustainability: Evidence from G7 Countries

Abstract

This paper analyses the impact of financial development on the environmental quality and sustainability for the group of G7 countries over the period 1990–2019 based on static panel data-fixed effect models. The objective is to explore if there exists a non-linear relationship between the whole financial system development and a wide array of measures of environmental sustainability and degradation, namely adjusted net savings, greenhouse gas, CO2, methane, nitrous oxide emissions and ecological footprint. We define a new Financial Environmental Kuznets Curve (FEKC) by introducing the square term of financial development on the environment-finance relationship. Empirical results prove the existence of non-linear relationships between the composite index of financial development and environmental degradation for the group of advanced economies. In the case of methane, we validate the presence of an inverted-U shape association in line with the FEKC hypothesis, while for greenhouse gas and CO2 the link follows a U-shaped pattern. The impact of financial development on environmental sustainability is monotonically positive and statistically significant while the ecological footprint is not statistically linked with the level of financial development within G7 countries. Economic growth, human capital, population density and primary energy consumption appear as significant drivers of environmental quality and sustainability.

The Impact of Financial Development on Renewable Energy Consumption: A Multidimensional Analysis Based on Global Panel Data

“…Besides, all indexes in this system were calculated with the identical methods and process, therefore enabling us to analyze the impact of financial development on renewable energy consumption in a unified framework. Several scholars adopted variables in this index system to indicate the level of financial development in empirical research [ 45 , 46 , 47 ]. The original variables, methodology, and other detailed information concerning the index system are introduced in the original literature.…”

Can Economic Growth and Environmental Protection Achieve a “Win–Win” Situation? Empirical Evidence from China

“…The sustainability of the region depends on how the economy and the environment interact [ 90 , 91 ]. To sustainably reduce the issue of trade-offs between environmental preservation and economic growth, the central government must create a more effective system of environmental protection measures [ 84 , 85 , 86 , 92 ].…”

Towards environmental sustainability: nexus of ecological footprint, human capital, economic growth and energy consumption in India

“…For this investigation, five potential variables have been considered: “Ecological footprint”, “human capital” (Yang et al ., 2022; Ahmad and Wang, 2019; Zafar et al ., 2019), “GDP per capita” (Rafique et al ., 2022; Udemba, 2020), “energy consumption” (Ivanovski and Hailemariam, 2022; Udemba, 2020) and “trade openness” (Rafique et al ., 2022; Ilkay et al ., 2021). A thorough review of existing literature has meticulously guided the selection of variables (Rafique et al ., 2022; Ruza and Caro-Carretero, 2022; Yildiz et al ., 2022; Ilkay et al ., 2021; Ozturk and Salah Uddin, 2012) and aligned with the paramount requirements specific to India. The rationale behind selecting “human capital” as an explanatory variable in this study is underpinned by the imperative context of developing nations.…”

“…Conversely, in the early phases of expansion, the main aim of policymakers in every country is to accomplish progress, even at the cost of the environment. Hence, those countries import inexpensive, environmentally harmful technology to increase output, thereby degrading environmental worth (Ruza and Caro-Carretero, 2022; Radmehr et al ., 2022; Mishra and Dash, 2022). It is well known that India and other developing nations are driven by a desire for economic growth, exacerbating environmental damage (Yildiz et al ., 2022).…”

“…Environmental awareness campaigns need to be started nationwide to educate the population about changes in climate and the value of pro-environmental behaviours, such as conserving energy, water, recycling and renewable energy sources. Environmental awareness programmes can be made more effective through print and electronic media (Ruza and Caro-Carretero, 2022). Studying energy, global climate change and the environment should be part of formal education to build an environmentally responsive society.…”