Green finance and sustainable development in Europe

Abstract

This study provides a comprehensive analysis of whether financial development impacts environmental degradation, over time. It highlights how financial development, institutional frameworks, and foreign investment dictate the extent of green development. The sample includes 40 countries in Europe and data is collected on a large set of variables, for the years from 1990 to 2019. Financial development is measured through domestic credit to the private sector, bank credit to the private sector and foreign direct investment (FDI). Environmental degradation is measured through energy use, CO2 emissions, greenhouse emissions and natural resource depletion. The model controls for income levels, institutional quality, technology, education, population, and urbanization. Regression analysis is conducted to analyze the data. The results suggest that financial development has a negative relationship with four different measures of environmental degradation, while FDI and institutional quality appear to worsen the environmental measures. Recommendations for policy makers include development of green finance policies and strong institutions, to lower environmental degradation in the long run.