A Pathway Towards Sustainable Development: Analysing the Influential Role of Microfinancing on Environmental Quality in Developing Nations

ABSTRACT Rapidly growing microfinancing (MF) in developing nations attracts intensive research from a sustainable development perspective, specifically its impact on environmental quality. Realizing the urgency of this research area, the current study investigates the nexus between MF and EQ by scrutinizing the macro‐level influence of MF on carbon dioxide emissions (CO 2 e). The World Bank's MIX market data is used for the empirical investigation, providing panel data of microfinancing for 40 countries. The estimates from second‐generation econometric techniques, namely, Method of Moments Quantile Regression (MMQR) and Extended Instrumental Variables Regression (EIVR), reveal the following findings. First, microfinancing in selected developing nations is significantly and negatively associated with CO 2 e, and the influence gradually increases over the long term. Second, the impact is more prominent in upper‐middle‐income countries than in lower and lower‐middle‐income countries. Third, mechanism analysis shows that microfinancing reduces CO 2 e for better environmental quality by promoting renewable energy consumption and fostering green economic growth. This study confirms the robustness of the results by replacing key variables and applying quantile regression analysis. The findings provide dynamic insights into improving environmental quality through reducing CO 2 e, linked to microfinancing as expanded financial operations in rural areas for marginalized populations. It is suggested that eco‐efficiency‐focused credit disbursement with environmental practice training initiatives can sustain the long‐run benefits of microfinancing. Additionally, it offers more effective strategies for microfinance initiatives aimed at the SDGs across different income groups.