Aligning financial development with environmental sustainability in Saudi Arabia: Evidence from Islamic finance and renewable energy investment

Environmental sustainability has become a national priority for Saudi Arabia as it advances economic diversification beyond fossil fuels. While financial development and economic growth have historically supported progress, they have also intensified carbon emissions and environmental stress. Transitioning toward a sustainable financial system—anchored in Islamic finance and renewable energy investment—is crucial to achieving the Kingdom’s Vision 2030 and its net-zero emissions target by 2060. This study addresses a key empirical gap by examining how renewable energy investment moderates the relationship between financial development and environmental sustainability from 2005 to 2022. Using the Generalized Method of Moments, the analysis explores (i) the direct impacts of financial development, Islamic finance, and renewable energy investment on environmental quality; (ii) the moderating role of renewable energy investment in this nexus; and (iii) the nonlinear dynamics captured through a quadratic specification of financial development. The results confirm an inverted U-shaped Environmental Kuznets Curve: financial development initially enhances but later deteriorates environmental quality. Islamic finance positively influences sustainability by channeling capital into ethical and green projects, while renewable energy investment mitigates the negative environmental effects of financial expansion, facilitating a low-carbon transition. Policy recommendations highlight the need to reinforce green financial regulations, expand renewable energy financing, and promote Islamic green instruments to align financial development with long-term environmental objectives.