Financial Development and Environmental Sustainability: The Role of Renewable Energy in Non-Oil Exporting Emerging Economies

Abstract

Financial development is frequently viewed as a means of inspiring investment, technological innovation and infrastructure development, which in turn can drive sustainable economic transition. However, the impacts on the environment of the growth of financial systems are not clear, especially in emerging economies where increased economic activity is still reliant upon fossil fuels. The study analyzes the direct relationship between financial development and environmental sustainability as well as the indirect route via the adoption of renewable energies, based on the theoretical concepts of sustainable finance, energy transition and the Environmental Kuznets Curve (EKC), which are also discussed using panel data from emerging countries over the period of 1995-2022. The study employs the Feasible Generalized Least Squares (FGLS) method, and concludes that financial development has a positive impact on CO₂ emissions, thus confirming that financial expansion remains to a large extent focused on traditional, carbon-intensive economic activities. The control variables also suggest that economic and structural factors are also significant in explaining environmental outcomes in emerging economies. Contrary to the view that renewable energy acts as a linker between financial development and environmental sustainability, renewable energy significantly lowers CO₂ emissions, however, it does not mediate the relationship between financial development and environmental sustainability. Rather, its incorporation reinforces the estimated effect of financial development, suggesting a suppression, rather than mediation effect. The results indicate that the level of renewable energy use is too low to counteract the environmental impacts created by financial development. The study suggests that green financial regulation needs to be strengthened, and that green finance instruments should be expanded, green finance mechanisms for renewables should be improved, and environmental issues should be incorporated into policies for the financial sector.