Does financial development influence environmental quality? Evidence from emerging and developing countries

Abstract This study aims to explore the link between financial development (FD) and economic growth on environmental quality in 60 developing and emerging countries over the period 1980–2021. Before assessing the employed model, the CDS, slope heterogeneity, and CIPS tests are performed for the study variables. Afterwards, the Pooled Mean Group and panel quantile regression techniques are carried out. The countries were clustered to assess the impact of FD and the study variables on environmental quality, as measured by CO 2 emissions. Additionally, the Dumitrescu-Hurlin panel causality test was performed. The findings revealed a positive relationship between variables and CO 2 in some clusters, which contributed to greater environmental degradation. In contrast, in other clusters, there was a significant negative relationship existed between study variables and CO 2 emissions, which helped to mitigate of environmental damage. The discrepancy in results between groups can be related to differences in income levels, development patterns, production technologies, FD scores, and other socioeconomic characteristics between countries. The study underlines the crucial role of policymakers, authorities, and financial institutions in achieving the 2030 sustainable development goals (SDGs) 7, 11, 12, and 13 to improve the environmental quality in developing and emerging countries. It recommends that policies and strategies be undertaken to promote environmentally friendly products, eliminate polluting activities, embrace eco-friendly manufacturing technologies, and increase the use of bioenergy and renewable energy while reducing nonrenewable energy use. Policymakers, authorities, civic society, and financial institutions must all take responsibility for ensuring the proposals' successful implementation.