Catalyzing green growth: How financial inclusion and trade reduce carbon intensity in Southern Africa

This study examines the impact of financial inclusion (FI) on carbon intensity (CI) across 12 Southern African Development Community (SADC) countries from 2000 to 2023. Using fixed effects and two-stage least squares (2SLS) models to address endogeneity, the analysis reveals that greater FI significantly reduces CI, supporting the ecological modernization perspective. The results uncover a non-linear, inverted U-shaped relationship, where FI initially increases CI through expanded consumption and industrialization, but later reduces emissions by facilitating access to clean technologies and green finance. Trade openness is identified as a key transmission channel, enhancing FI's environmental benefits via technology diffusion, consistent with the Pollution Halo Hypothesis. Heterogeneity analysis shows that FI's impact is stronger in countries with higher GDP per capita and lower population densities, while resource-dependent economies exhibit weaker outcomes, suggesting limited absorptive capacity and governance challenges. The COVID-19 pandemic disrupted these gains, highlighting the vulnerability of sustainable finance systems to external shocks. The findings underscore the need for integrated policies that link inclusive finance, trade openness, and environmental regulation. This study contributes to emerging literature on sustainable finance and offers actionable insights for advancing low-carbon development in resource-constrained regions. • Financial inclusion significantly reduces carbon intensity in SADC countries. • Inverted U-shaped relationship reveals non-linear effects of financial inclusion. • Trade openness mediates and amplifies FI's impact on carbon intensity. • Impact of FI varies by GDP, population density, and resource dependence. • COVID-19 disrupted the environmental benefits of financial inclusion.