Role of digitalization and environmental policy stringency in the relationship between financial development and environmental sustainability

Financial development is often viewed as a cornerstone of economic progress, yet its expansion may come with an environmental cost. This raises a critical question of whether digitalization and environmental policy stringency can weaken the link between financial development and ecological degradation. Grounded in the STIRPAT theoretical framework, this study examines the effects of financial development, digitalization, environmental policy stringency, economic globalization, economic growth, and urbanization on ecological footprint (EF) across 27 OECD countries from 1990 to 2020. It further investigates the moderating roles of digitalization and environmental policy stringency in the relationship between financial development and EF. The results from the Method of Moments Quantile Regression (MM-QR) show that financial development increases EF, and the effect is more pronounced at higher quantiles. In contrast, digitalization and environmental policy stringency are associated with lower EF across the conditional distribution. Importantly, the interaction results indicate that both digitalization and environmental policy stringency significantly moderate the relationship between financial development and EF. This suggests that greater digitalization and stronger environmental policy stringency can mitigate the environmental pressure associated with financial development. Economic globalization also increases EF across all quantiles, while economic growth and urbanization are positively associated with EF, indicating that these factors contribute to greater ecological pressure. Overall, the findings highlight the importance of coordinating financial, digital, and environmental policies to limit the ecological costs of financial development and promote environmental sustainability in OECD economies.