Opening the Black Box of Financial Innovation and Sustainability Transitions: Unveiling the Roles of Green Entrepreneurship and Carbon Finance in <scp>G20</scp> Countries

ABSTRACT The environmental quality continues to be in the focus of sustainable economic development, but the process by which financial innovation influences the environment is not comprehended in full. The paper examines the relationship between green entrepreneurship, based on a composite index of renewable and nuclear energy generation and carbon finance and the environmental quality in G20 economies in the period between 2000 and 2022, measured as domestic credit to the private sector (% of GDP). Four environmental indicators are used in a multidimensional framework: population‐weighted PM 2.5 exposure and carbon dioxide emissions along with ecological and material footprints (Pressures on the environment 2010, 5). These measures are combined to generate one robustness measure by a composite Environmental Pressure Index (EPI) made using principal component analysis (PCA). The complementary drivers are digitalization, financial freedom, openness to trade, and dependence on natural resources. In the models based on the cross‐sectional autoregressive distributed lag (CS‐ARDL) framework, the Feasible Generalized Least Squares (FGLS) estimator, the results reveal that green entrepreneurship, carbon finance, and digitalization have a significant negative effect on environmental pressure, respectively, and trade openness, financial freedom, and the exploitation of natural resources contribute to their enhancement. The Dumitrescu–Hurlin causality test also shows that environmental performance is Granger‐caused by financial and technological innovation. These results underscore the fact that the growth of green credit, reinforcement of digital infrastructure, and the promotion of low‐carbon entrepreneurship are the most important in terms of further development of the Sustainable Development Goals (SDGs) on innovation, responsible consumption, and climate action.