Does Financial Development Improve Environmental Sustainability? Comparative Evidence From Developed and Developing Countries Among the World's Five Largest Economies

ABSTRACT As countries strive to balance economic growth with climate commitments under the Sustainable Development Goals, understanding whether financial development supports or undermines environmental sustainability across different stages of development has become increasingly important. The study examines the impact of financial development on environmental sustainability by studying the top five economies in the world. The study also offers a comparative analysis of developing and developed countries. The data for this study have been collected from the WDI database for the period from 1999 to 2020. I have applied both Pooled OLS and Fixed Effect Model for the analysis. The non‐linear relationship between financial development and environmental sustainability has also been analysed. The results show that for developed countries, financial development increases CO 2 , but the effect decreases at higher credit levels. In developing countries, the impact is gradual and less pronounced. Urbanisation has a positive impact on environmental sustainability (ES) in developed economies, but it has a negative impact on ES in developing ones. GDP growth generally has a positive impact on emissions for both groups. These findings have important implications for achieving SDG 13 (Climate Action) and SDG 11 (Sustainable Cities and Communities) by highlighting the need for tailored financial and urban policies based on development level.