From Shadow to Green Economy: The Moderating Role of Financial Inclusion in Developing Countries

ABSTRACT This research explores the complex relationship between the shadow economy (informal economy), access to financial services, and sustainable development in emerging economies, highlighting their connection to the sustainable development goals (SDGs). The study aims to address a critical gap in understanding how financial inclusion can modulate the impact of the shadow economy on key green transition indicators, thereby informing policies for a sustainable and inclusive green economy. To address this gap, we draw on the Environmental Kuznets Curve framework and theories of financial intermediation to hypothesize that financial inclusion moderates the environmental impact of the shadow economy. By analyzing panel data from 85 nations spanning from 2000 to 2020 and utilizing advanced econometric methods, such as Panel‐Corrected Standard Errors (PCSE), Feasible Generalized Least Squares (FGLS), and GMM‐based quantile regression, it investigates the influence of unregulated economic activities on energy efficiency and the adoption of renewable energy sources. The results indicate that the growth of the informal economy consistently reduces energy efficiency, revealing its negative environmental impacts. In contrast, improved access to financial services significantly alleviates these detrimental effects and encourages the use of renewable energy, thereby supporting SDGs 7, 9, 11, and 13. Notably, in certain situations, informal sectors may aid in promoting renewable energy projects, suggesting the need for nuanced policy considerations. Ultimately, this study emphasizes the crucial importance of financial reforms in developing sustainable and equitable energy systems, which are essential for a resilient green economy aligned with the SDGs.