Unveiling the effect of renewable energy and financial inclusion towards sustainable environment: Does interaction of digital finance and institutional quality matter?

Abstract

Maintaining environmental sustainability has escalated to the top of the agenda in practically all nations today, including Pakistan. Hence, our research supports the United Nations sustainable development goal line, specifically SDG-11 for sustainable societies and SDG-13 for mitigating climate change vulnerability. To address these challenges, the present study investigates the association of digital finance, financial inclusion, renewable energy, and institutional quality with environmental sustainability in Pakistan. While financial inclusion is assessed using five proxies that are indexed by principal component analysis (PCA), digital finance is quantified by the number of ATMs. We used data from 2004 to 2021 to explore the relationship among the study variables. Employing the auto-regressive distributed lag (ARDL) model, we examined the long-run and short-run symmetric relationships between variables. Additionally, the study investigate the moderating impact on environmental sustainability by analysing the interaction term of institutional quality and digital finance (DF*INSQ). The results show that financial inclusion and digital finance can help developing countries like Pakistan achieve environmental sustainability. The study also highlights the vital role of renewable energy sources in the long-term reduction of carbon emissions. Moreover, the interaction between digital finance and institutional quality presents positive prospects for advancing environmental sustainability. These findings underscore the necessity of redefining financial inclusion and giving environmental sustainability projects top priority. They provide insightful information for policymakers and digital financial service providers in less developed countries. Furthermore, the study emphasizes the importance of robust financial institutions prioritizing renewable energy and institutional integrity for long-term financial health and growth.