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

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.

Automated summary

This paper examines the impact of financial development on environmental quality and sustainability in G7 countries from 1990 to 2019. The study finds evidence of nonlinear relationships between financial development and environmental degradation, with methane emissions following an inverted-U shape association and greenhouse gas and CO2 emissions exhibiting a U-shaped pattern. Financial development has a positive and statistically significant impact on environmental sustainability, although there is no significant correlation with ecological footprint among G7 countries. Economic growth, human capital, population density, and primary energy consumption are identified as significant drivers of environmental quality and sustainability.