Balancing Economic Growth and Environmental Sustainability in Developing Countries: The Role of Financial Innovation

Abstract

Many developing economies continue to grapple with significant environmental degradation, even after experiencing remarkable economic growth in recent decades. Rapid industrialization, urbanization, and increased energy consumption have driven impressive economic progress but often at the expense of environmental sustainability. The overreliance on fossil fuels, deforestation, and unregulated industrial activities have contributed to air and water pollution, loss of biodiversity, and increased greenhouse gas emissions. This study aims to examine the impact of green finance, digital finance, and natural resources on carbon dioxide emissions for a panel of 23 developing countries over the period 2010–2023. The focus on green finance explores its potential to channel investments into environmentally friendly projects, thereby reducing emissions and promoting sustainable development. Digital finance is analyzed for its role in enhancing efficiency, improving access to financial services, and fostering innovative solutions to environmental challenges. The inclusion of natural resources considers their dual role as contributors to economic growth and, if mismanaged, drivers of environmental degradation. By assessing these factors, the study seeks to provide insights into the dynamics between financial innovation, resource management, and environmental sustainability. The findings will help policymakers and stakeholders in developing countries design targeted strategies that balance economic development with the urgent need to mitigate CO2 emissions and achieve sustainable growth. The causality test findings reveal that green finance, digital finance, and natural resources do not Granger-cause CO2 emissions, indicating no direct causal relationship in this context. However, the analysis highlights that natural resources and digital finance significantly contribute to improving environmental quality. These results underscore the potential of these factors to play a constructive role in achieving environmental sustainability when managed effectively. Based on these findings, the study recommends policies aimed at the efficient utilization of natural resources. This includes adopting sustainable resource management practices that minimize environmental degradation while maximizing economic benefits. Policymakers should focus on enhancing resource efficiency and promoting renewable resource alternatives to reduce the environmental footprint of resource-dependent sectors. For digital finance, the study emphasizes its potential to support environmental sustainability through increased financial inclusion, improved resource allocation, and the facilitation of green investments. Strategies should include incentivizing digital platforms that promote eco-friendly financial products and leveraging digital technologies to monitor and manage environmental impacts effectively.