Stock Market Development and Environmental Sustainability in Africa

Abstract

The level of environmental vulnerabilities is elevated in Sub-Saharan Africa. This study adopted an African perspective to evaluate the impact of capital market development on environmental sustainability, drawing on inclusive theoretical and empirical constructs of the nexus between the two. Beyond carbon emissions as a proxy for environmental quality, the study added proxies for natural resources and forest depletion to examine the relationship. The sample consisted of 10 countries, and data were collected between 1993 and 2022. Econometrically, we applied panel-estimated generalized least squares, cross-section seemingly unrelated regression with panel-corrected standard errors, dynamic ordinary least squares, and fully modified ordinary least squares to investigate the static and dynamic relationships between the variables. Our observation was that the impact of stock market development on environmental sustainability depends on the proxy used to measure environmental sustainability. By and large, we observed that, on the one hand, stock market development significantly increases carbon emissions and, on the other hand, reduces forest and natural resource depletion. This study recommends that stock exchange regulators strictly enforce mandatory environmental impact disclosures and financial reporting regulations to ensure compliance by listed firms. For instance, regulators should require listed extractive industry firms to provide environmental accountability as part of their annual financial reporting, ensuring continuous compliance and ongoing monitoring of their environmental impacts. The issuance of climate-backed financial securities, such as green and brown bonds, is recommended to encourage firms to fund their green projects and to help firms with high emission rates transition to environmentally sustainable production methods.