Determinants of environmental sustainability

: the role of financial development

Abstract

Global climate change has become one of the most critical environmental challenges of our time, resulting from the negative externalities of economic and social development. Enhancing environmental sustainability has therefore become a global priority. Finance, as the lifeblood of the real economy, plays a crucial role in resource allocation and may also contribute to environmental improvement. Using panel data for 85 countries from 1995 to 2021, this study constructs a composite environmental sustainability index to capture the multidimensional nature of environmental performance. A dynamic panel framework based on the System Generalised Method of Moments is employed to examine the relationship between financial development and environmental sustainability. Furthermore, mechanism analysis is conducted to test the effects of scale, technology, and industrial composition, while heterogeneity and quantile regressions are used to explore cross-country and distributional variations. The findings reveal that financial development significantly promotes environmental sustainability, mainly through scale and technology effects, whereas the industrial composition effect is weak. The positive role of finance is more evident in emerging and developing economies, and its magnitude varies across different levels of sustainability. The results are inevitably influenced by institutional and policy contexts, such as environmental regulations, pollution control efforts, and green finance initiatives. Despite these limitations, the study offers novel cross-country evidence on how financial systems foster sustainability, providing valuable implications for integrating financial development with environmental policy.

Date of Award	2026
Original language	English
Awarding Institution	Canterbury Christ Church University