Financial development and green innovation, the ultimate solutions to an environmentally sustainable society: Evidence from leading economies

Abstract

The surge of economic activities in the world's top economies has resulted in a cumulative 57% of the world's pollution, leaving an innate impact on global environmental sustainability goals. This study investigates if financial development and green innovation play some role in de-escalating the pressing environmental challenges worldwide. By developing a comprehensive index for financial development, green innovation, and environmental sustainability from 2000 to 2019, this study aims to assess the impact of financial development and green innovation on environmental sustainability in the presence of renewable energy, non-renewable energy, industrial value-added, urbanization, gross domestic product, research and development and foreign direct investment as additional control variables. The Cross-section dependence and second-generation unit root tests have been deployed to rectify the data properties. Serving as the primary study model, the results of the panel threshold model shows that green innovation has a substantial impact on environmental sustainability and proves to be an effective tool for reducing the environmental pollution. Financial development also has a significant relationship with environmental sustainability, highlighting the significance of financial development in addressing environmental challenges. The robustness GMM test assured the validity of the study results, and granger causality reveals the substantial long-run impact of financial development and green innovation on environmental sustainability in leading economies. The present study helps policymakers and stakeholders identify the importance of green innovation and financial development to lessen environmental impacts while highlighting the role of energy choices in pursuit of long-run environmental interests.