EXPLORING THE ENVIRONMENTAL CONSEQUENCES OF FINANCIAL DEVELOPMENT AND FOREIGN INVESTMENTS IN OECD COUNTRIES

Abstract

Environmental quality is a critical indicator of sustainable development, reflecting the long-term health and resilience of ecosystems and human well-being. This study examines the environmental impacts of financial development and FDI in 27 OECD countries from 2000 to 2023. It utilizes both static and dynamic System GMM methodologies to explore the effects of financial development and FDI on environmental indicators, including carbon emissions, greenhouse gases, and sustainability. The findings reveal that bank credit reduces emissions, indicating its ecologically friendly nature, whereas private sector credit contributes to increased emissions, highlighting the need for regulatory measures. FDI negatively impacts emissions, confirming the pollution haven hypothesis; however, it also hinders sustainable development under certain conditions. The Environmental Kuznets Curve (EKC) is validated, with higher turning points suggesting that significant decarbonization in mature economies remains a challenging task. The results highlight the necessity of embedding sustainability into financial systems through green financing, stricter laws and regulations, and renewable energy incentives. These findings can assist practitioners and policymakers in aligning global financial development with sustainability goals.