Environmental Science and Pollution Research

, Volume 26, Issue 7, pp 6758–6772 | Cite as

The environmental impacts of financial development in OECD countries: a panel GMM approach

  • Fortune GandaEmail author
Research Article


Financial development is often expressed as a private sector initiative earmarked towards motivating economic growth and mitigating poverty. Nonetheless, the need for economic development accompanied by high industrialisation and commercialisation strategies has generated natural environmental effects which have raised enormous concern to green interest groups about whether all the seventeen sustainable development goals will be achieved. This paper investigated the environmental effects of financial development in OECD countries from 2001 to 2012 by employing static models and system GMM analysis. The study utilised foreign direct investments, domestic credit to private sector by banks and domestic credit to private sector as the three proxies of financial development. The effects of these measures of financial development were examined on carbon emissions and greenhouse gases (indicators of environmental quality) and environmental sustainability. In this setting, the findings of the research spotlight that domestic credit to private sector by banks shows a negative and significant relationship with carbon emissions, greenhouse gases and sustainability. Conversely, domestic credit to private sector and economic growth indicates a positive and statistically significant relationship with carbon emissions, greenhouse gases and sustainability. Foreign direct investment is positive and significantly connected with carbon emissions and sustainability but only shows a positive and not significant link with greenhouse gases. The evidence suggested by this analysis adds that the financial system should continue to add more initiatives which consider natural environmental perspectives in their current operations. This present study also confirms the existence of the environmental Kuznets curve (EKC) in carbon emissions (turning point, $109,820), total greenhouse gases (turning point, $74,280) and sustainability (turning point, $112,505). The finding that the turning point of carbon emissions is higher than that of total greenhouse gases indicates why introducing initiatives designed to curb growth of carbon emissions in the respective OECD economies is important.


Financial Development Carbon emissions Greenhouse gases Environmental sustainability Economic growth 



  1. Alam A, Malik IA, Abdullah AB, Hassan A, Awan U, Ali G, Zaman K, Naseem I (2015) Does financial development contribute to SAARC’S energy demand? From energy crisis to energy reforms. Renew Sust Energ Rev 41:818–829Google Scholar
  2. Ali W, Abdullah A, Azam M (2017) Re-visiting the environmental Kuznets curve hypothesis for Malaysia: fresh evidence from ARDL bounds testing approach. Renew Sust Energ Rev 77:990–1000Google Scholar
  3. Al-Mulali U, Weng-Wai C, Sheau-Ting L, Mohammed AH (2015) Investigating the environmental Kuznets curve (EKC) hypothesis by utilizing the ecological footprint as an indicator of environmental degradation. Ecol Indic 48:315–323Google Scholar
  4. Apergis N, Ozturk I (2015) Testing environmental Kuznets curve hypothesis in Asian countries. Ecol Indic 52:16–22Google Scholar
  5. Arellano M, Bond S (1991) Some tests of specification in panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stat 58:277–291Google Scholar
  6. Armeanu D, Vintilă G, Andrei JV, Gherghina ŞC, Drăgoi MC, Teodor C (2018) Exploring the link between environmental pollution and economic growth in EU-28 countries: is there an environmental Kuznets curve? PLoS One 13(5):e0195708Google Scholar
  7. Arrow K, Bolin B, Costanza R, Dasgupta P, Folke C, Holling CS, Pimentel D (1996) Economic growth, carrying capacity, and the environment. Environ Dev Econ 1(1):104–110Google Scholar
  8. Asghari M (2013) Does FDI promote MENA region’s environment quality? Pollution halo or pollution haven hypothesis. Int J Scien Res Environ Sci 1(6):92–100Google Scholar
  9. Bayeh E (2016) The role of empowering women and achieving gender equality to the sustainable development of Ethiopia. Pac Sci Rev B: Humanit. Soc Sci 2(1):37–42Google Scholar
  10. Berk I, Kasman A, Kılınç D (2018) Towards a common renewable future: the System-GMM approach to assess the convergence in renewable energy consumption of EU countries. Energy EconGoogle Scholar
  11. Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econ 87(1):115–143Google Scholar
  12. Boutabba MA (2014) The impact of financial development, income, energy and trade on carbon emissions: evidence from the Indian economy. Econ Model 40:33–41Google Scholar
  13. Bujari AA, Martínez FV, Lechuga GP (2017) Impact of the stock market capitalization and the banking spread in growth and development in Latin American: a panel data estimation with System GMM. Contaduría y administración 62(5):1427–1441Google Scholar
  14. Canadell JG, Le Quéré C, Raupach MR, Field CB, Buitenhuis ET, Ciais P, Marland G (2007) Contributions to accelerating atmospheric CO2 growth from economic activity, carbon intensity,and efficiency of natural sinks. Proc Natl Acad Sci 104(47):18866–18870Google Scholar
  15. Cao B, Fu K, Tao J, Wang S (2015) GMM-based research on environmental pollution and population migration in Anhui province, China. Ecol Indic 51:159–164Google Scholar
  16. Cole MA, Rayner AJ, Bates JM (1997) The environmental Kuznets curve: an empirical analysis. Environ Dev Econ 2(4):401–416Google Scholar
  17. Danish S, Shah B, Muhammad AL (2018) The nexus between energy consumption and financial development: estimating the role of globalization in Next-11 countries. Environ Sci Pollut Res 25(19):11–18661Google Scholar
  18. Destek MA, Sarkodie SA (2019) Investigation of environmental Kuznets curve for ecological footprint: the role of energy and financial development. Sci Total Environ 650:2483–2489Google Scholar
  19. Dinda S (2004) Environmental Kuznets curve hypothesis: a survey. Ecol Econ 49(4):431–455Google Scholar
  20. Dinh HL, Shih-Mo L (2014) CO2 emissions, energy consumption, economic growth and FDI in Vietnam. Manag Global Trans 12(3):219Google Scholar
  21. Dogan E, Turkekul B (2016) CO2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA. Environ Sci Pollut Res 23(2):1203–1213Google Scholar
  22. Farhani S, Ozturk I (2015) Causal relationship between CO2 emissions, real GDP, energy consumption, financial development, trade openness, and urbanization in Tunisia. Environ Sci Pollut Res 22(20):15663–15676Google Scholar
  23. Ganda F (2018) Carbon emissions, diverse energy usage and economic growth in Zimbabwe: investigating existence of the Environmental Kuznets Curve (EKC) within a developing economy context. Int J Sustain Econ 10(3):226–248Google Scholar
  24. Ganda F, Ngwakwe CC (2013) Environmental, social and governance disclosure: transition towards a sustainable economy. Korean Soc Sci J 40(1):21–37Google Scholar
  25. Gujarati DN, Porter DC (2009) Panel data regression models. Basic econometrics (Fifth international ed.). McGraw-Hill, BostonGoogle Scholar
  26. Halkos GE (2003) Environmental Kuznets Curve for sulfur: evidence using GMM estimation and random coefficient panel data models. Environ Dev Econ 8(4):581–601Google Scholar
  27. He W, Gao G, Wang Y (2012) The relationship of energy consumption, economic growth and foreign direct investment in Shanghai. Adv Appl Econ Financ 3(1):507–512Google Scholar
  28. Huang Y (2010) Determinants of financial development. Palgrave Mcmillan, LondonGoogle Scholar
  29. Jalil A, Feridun M (2011) The impact of growth, energy and financial development on the environment in China: a cointegration analysis. Energy Econ 33(2):284–291Google Scholar
  30. Javid M, Sharif F (2016) Environmental Kuznets curve and financial development in Pakistan. Renew Sust Energ Rev 54:406–414Google Scholar
  31. Katircioğlu ST, Taşpinar N (2017) Testing the moderating role of financial development in an environmental Kuznets curve: empirical evidence from Turkey. Renew Sust Energ Rev 68(1):572–586Google Scholar
  32. Khan MA, Khan MZ, Zaman K, Arif M (2014) Global estimates of energy-growth nexus: application of seemingly unrelated regressions. Renew Sust Energ Rev 29:63–71Google Scholar
  33. Khan MTI, Yaseen MR, Ali Q (2017) Dynamic relationship between financial development, energy consumption, trade and greenhouse gas: comparison of upper middle income countries from Asia, Europe, Africa and America. J Clean Prod 161:567–580Google Scholar
  34. Kuznets S (1955) Economic growth and income inequality. Am Econ Rev 45(1):1–28Google Scholar
  35. Lee JW (2013) The contribution of foreign direct investment to clean energy use, carbon emissions and economic growth. Energy Policy 55:483–489Google Scholar
  36. Lu WC (2017) Greenhouse gas emissions, energy consumption and economic growth: a panel cointegration analysis for 16 Asian countries. Int J Environ Res Public Health 14(11):1436Google Scholar
  37. OECD (2015) Enhancing the financing of the real economy and financial stability in the United Kingdom. Economics Department, Working Papers No. 1245, 75775 Paris Cedex 16, FranceGoogle Scholar
  38. Omri A, Kahouli B (2014) Causal relationships between energy consumption, foreign direct investment and economic growth: fresh evidence from dynamic simultaneous-equations models. Energy Policy 67:913–922Google Scholar
  39. Oseni IO (2016) Exchange rate volatility and private consumption in Sub-Saharan African countries: A system-GMM dynamic panel analysis. Future Bus J 2(2):103–115Google Scholar
  40. Pao HT, Tsai CM (2011) Multivariate Granger causality between CO2 emissions, energy consumption, FDI (foreign direct investment) and GDP (gross domestic product): evidence from a panel of BRIC (Brazil, Russian Federation, India, and China) countries. Energy 36(1):685–693Google Scholar
  41. Pesaran MH (2003) A simple panel unit root test in the presence of cross section dependence. Camb Work Papers Econ 22(2):265–312Google Scholar
  42. Pesaran MH (2004) General diagnostic tests for cross section dependence in panels. University of Cambridge-IZA Discussion Paper, No. 1240Google Scholar
  43. Pesaran MH (2006) Estimation and inference in large heterogeneous panels with a multifactor error structure. Econom 74(4):967–1012Google Scholar
  44. Salahuddin M, Gow J, Ozturk I (2015) Is the long-run relationship between economic growth, electricity consumption, carbon dioxide emissions and financial development in Gulf Cooperation Council Countries robust? Renew Sust Energ Rev 51:317–326Google Scholar
  45. Sarkodie SA, Strezov V (2019) Effect of foreign direct investments, economic development and energy consumption on greenhouse gas emissions in developing countries. Sci Total Environ 646(1):862–871Google Scholar
  46. Seker F, Ertugrul HM, Cetin M (2015) The impact of foreign direct investment on environmental quality: a bounds testing and causality analysis for Turkey. Renew Sust Energ Rev 52:347–356Google Scholar
  47. Shahbaz M, Nasreen S, Abbas F, Anis O (2015) Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries? Energy Econ 51:275–287Google Scholar
  48. Shahbaz M, Solarin SA, Mahmood H, Arouri M (2013) Does financial development reduce CO2 emissions in Malaysian economy? A time series analysis. Econ Model 35:145–152Google Scholar
  49. Svirydzenka K (2016) Introducing a new broad-based index of financial development. International Monetary Fund Working Paper WP/16/5, Washington, DCGoogle Scholar
  50. Taguchi H (2012) The environmental Kuznets Curve in Asia: the case of sulphur and carbon emissions. Asia Pacific Dev J 19(2):77–92Google Scholar
  51. Tamazian A, Rao BB (2010) Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies Energy Econ 32(1):137–145Google Scholar
  52. Tang CF, Tan BW (2015) The impact of energy consumption, income and foreign direct investment on carbon dioxide emissions in Vietnam. Energy 79:447–454Google Scholar
  53. Twerefou DK, Danso-Mensah K, Bokpin GA (2017) The environmental effects of economic growth and globalization in Sub-Saharan Africa: a panel general method of moments approach. Res Int Bus Financ 42:939–949Google Scholar
  54. Van Vuuren DP, Riahi K (2008) Do recent emission trends imply higher emissions forever? Clim Chang 91(3–4):237–248Google Scholar
  55. Wooldridge JM (2013) Random effects estimation. Introductory econometrics: a modern approach (Fifth international ed.). MasonGoogle Scholar
  56. Xiong L, Tu Z, Ju L (2017) Reconciling regional differences in financial development and carbon emissions: a dynamic panel data approach. Energy Procedia 105:2989–2995Google Scholar
  57. Zhang Y, Zhang S (2018) The impacts of GDP, trade structure, exchange rate and FDI inflows on China's carbon emissions. Energy Policy 120:347–353Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Faculty of Management and Law, School of Accountancy, Department of Financial ManagementUniversity of LimpopoSovengaSouth Africa

Personalised recommendations