Greening African economies: Investigating the role of financial development, green investments, and institutional quality

Abstract

This study investigates the impact of financial development (FD) and green investments (GIs) on environmental pollution in Eastern and Southern African countries from 1990 to 2020. The research not only investigates the direct impacts of FD and green finance on environmental pollution but also examines the moderating role of institutional quality (IQ) and possible nonlinear effects of FD and green finance. Our analysis from the Panel autoregressive distributed lag (ARDL) long‐run PMG reveals a negative association between FD, green investment, and environmental pollution, indicating that a well‐developed financial sector supports sustainable initiatives, leading to improved environmental outcomes. IQ moderates this relationship, with strong governance enhancing the positive effects of FD and green finance on environmental preservation. Interestingly, the study identifies nonlinear impacts, suggesting that beyond a certain threshold, the contributions of FD and GIs to environmental preservation may diminish. Recognizing these nonlinearities and the role of IQ can inform more targeted policies for maximizing efforts toward environmental conservation in African economies.