Green policies and financial development in G7 economies: An in‐depth analysis of environmental regulations and green economic growth

Abstract

AbstractThis comprehensive study explores the nuanced relationship between financial development and its determinants within the G7 nations, spanning the years 1990 to 2020. Motivated by the need to understand long‐term financial trends, we meticulously analyze key variables including total natural resource rent, Environmental Policy Stringency Index, total energy consumption, green gross domestic product (GDP), and foreign direct investment inflow. Employing rigorous diagnostic tests to ensure the robustness of our findings, advanced methodologies such as “Method of Moment Quantile Regression,” along with simulations of “Bootstrap Quantile Regression," “Panel Corrected Standard Errors,” and “Feasible Generalized Least Squares” regressions uncover the statistical significance and practical implications of our results. Our pivotal findings carry substantial implications for both individual G7 member states and the collective group. Highlighting a positive correlation between stringent environmental policies, measured by the Environmental Policy Stringency Index, and financial development, our study emphasizes the imperative for these nations to align economic and environmental policies. Striking a harmonious balance between resource management and sustainable environmental regulations not only fosters financial growth but also addresses global environmental concerns. Furthermore, the adverse impact of total energy consumption on financial development underscores the urgent need for G7 nations to prioritize energy efficiency and transition to sustainable sources, aligning with the global trend towards eco‐friendly practices. In response to these critical findings, we propose actionable policy measures. To align with the growing climate crisis and standardize green finance practices, we advocate for the establishment of a jointly funded Climate Resilience and Adaptation Fund and a unified Green Bond Framework within the G7. These measures not only enhance climate resilience and streamline sustainable investments but also demonstrate the G7's collective commitment to a greener and more prosperous future.