Renewable energy transition, financial development, and financial inclusion effects on environmental sustainability in developing economies

Abstract

The transition to low-carbon development remains a central challenge for developing economies, particularly in the context of uneven financial access and ongoing structural transformation. This study examines the dynamic and heterogeneous relationships between renewable energy transition, financial development, financial inclusion, and environmental sustainability across 30 developing economies over the period 2011–2025. Using a balanced panel of 450 observations, the analysis integrates cross-sectionally augmented ARDL, two-step System-GMM, panel quantile regression, panel threshold modelling, and explainable gradient boosting with SHAP validation to address endogeneity, heterogeneity, and nonlinear policy dynamics. The results consistently indicate that renewable energy transition reduces carbon intensity in the long run, with stronger effects observed in high-emission economies. Financial development also contributes to improved environmental efficiency once dynamic persistence is accounted for. Importantly, financial inclusion emerges as a key conditioning factor: both interaction and threshold results suggest that the environmental benefits of renewable energy and financial deepening vary with the level of financial access and become more pronounced beyond a critical threshold. Control variables support environmental Kuznets curve dynamics, as higher income improves emission efficiency, while industrialisation and trade openness increase environmental pressure. The machine-learning results provide complementary predictive validation and highlight the relevance of nonlinear interaction effects. Overall, the findings identify financial inclusion as a critical policy lever linking energy transition and sustainable finance, offering actionable insights for developing economies pursuing low-carbon growth.