The impact of climate degradation originating from the aviation sector on financial development and ESG index: EU member states’ case

This study examines the impact of aviation-induced climate degradation on financial development and environmental, social, and governance (ESG) performance in European Union member states. To capture sector-specific environmental pressure, a Climate Degradation Index (CDI) is constructed from aviation-related landing and take-off emission indicators, while a country-level ESG index is derived from environmental, social, and governance indicators through Principal Component Analysis (PCA). Drawing on financial development theory, the Environmental Kuznets Curve (EKC) hypothesis, stakeholder theory, and the growth-environment trade-off framework, the analysis employs robust panel data estimators that account for cross-sectional dependence, autocorrelation, heteroskedasticity, and potential dynamic endogeneity. The results reveal a consistent dual pattern: aviation-related climate degradation is positively associated with the Financial Development Index (FDI), but it weakens ESG performance. This suggests that aviation activity can deepen financial systems through mobility, trade integration, tourism, logistics, investment demand, and capital flows, while simultaneously creating transition and environmental risks that reduce sustainability performance. The study therefore contributes to the literature by showing that aviation-induced climate degradation operates not only as an environmental externality but also as a structural channel through which financial expansion and sustainability pressures interact. Policy implications point to aviation-specific carbon pricing, sustainable aviation fuels, green aviation technologies, stronger ESG disclosure, and financial regulations that align sectoral growth with low-carbon transition objectives.