The Relationship Between Financial Development and Carbon Emissions: A Systematic Review

Abstract

Purpose: This paper aims to review and analyze the prior research on the relationship between financial development and carbon emissions. As the financial sector develops and the economies grow, carbon emissions are expected to increase. Therefore, it is necessary to identify and understand the factors that contribute to this relationship. Theoretical framework: Recent studies indicate that financial development facilitates and expands businesses, which may cause an increase in carbon emissions; on the other hand, sustainable development of the financial sector may lead to lower carbon emissions through eco-friendly investments. Design/Methodology/Approach: This study will employ a systematic literature review to investigate the relationship between financial development and carbon emissions and analyze how developing and developed countries differ concerning these two factors. Findings: The result showed that empirical studies have produced various, frequently contradicting findings and conclusions. Some studies show a strong positive correlation between financial development, environmental performance indices, and economic growth, while others find a more nuanced correlation. Research, practical & social implications: This study might stimulate additional investigation into green financial development and emission reductions through green investments. Findings could aid in adjusting policies to account for disparities between developed and developing countries' financial-emission relationships. Green financial instruments might encourage eco-investments and reduce emissions. The social advantages include helping to reduce gaps by providing resources and expertise to poorer nations, promoting sustainability, and contributing to climate solutions. Originality/Value: This research thoroughly assesses and analyzes prior research on the relationship between financial development and carbon emissions. Particularly in the context of developed and emerging countries, the study helps to investigate and comprehend the elements contributing to this relationship.