The Impact of Financial Stability on Environmental Degradation: Mediating Role of Green Investment and Moderating Role of Environmental Awareness

Naeem, Huzefa and Ali, Amjad and Audi, Marc (2025): The Impact of Financial Stability on Environmental Degradation: Mediating Role of Green Investment and Moderating Role of Environmental Awareness.

Abstract

This research investigates the influence of financial development on environmental outcomes, with green investment as a mediating variable and environmental awareness as a moderating factor. To achieve this, the authors employ a mixed-methods approach, analyzing long-term panel data from thirty countries and supplementing quantitative findings with stakeholder interviews conducted in Germany and India, thereby enriching the analysis with diverse perspectives. Financial development is measured by indicators such as gross domestic product growth and banking sector strength, while environmental degradation is proxied by per capita carbon dioxide emissions. Green investment is assessed by comparing renewable energy financing to gross domestic product, and the level of environmental awareness is gauged by the extent to which populations prioritize ecological concerns. The findings reveal that financial stability contributes to reduced environmental harm, with green investment serving as a significant channel for this effect. Moreover, heightened environmental awareness amplifies the positive impact of financial stability on green investment. The analysis indicates that regions characterized by both financial stability and a well-informed public are more successful in transitioning to clean energy, whereas emerging economies encounter greater obstacles due to insufficient support systems and the inherent challenges of simultaneous development. The study concludes that robust financial systems alone are insufficient to deliver ecological benefits; meaningful progress requires a combination of green investment and active public engagement. Policymakers are advised to formulate climate-responsive financial regulations, invest in public awareness campaigns, and devise context-specific strategies tailored to cultural differences to advance both environmental protection and economic development. By elucidating the role of awareness in fostering sustainable transformation, this research contributes to the literature on the Environmental Kuznets Curve and stakeholder theory, offering practical recommendations for aligning global economic activity with ecological boundaries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Stability, Environmental Degradation, Green Investment, Environmental Awareness
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services

References

Abbas, F. (2024). Financial instability and environmental degradation: evidence from South Asia. Energy & Environment, 35(7), 3785-3802.

Adams, S., & Klobodu, E. K. M. (2018). Financial development and environmental degradation: does political regime matter? Journal of cleaner production, 197, 1472-1479.

Adebayo, T. S., Kartal, M. T., Ağa, M., & Al-Faryan, M. A. S. (2023). Role of country risks and renewable energy consumption on environmental quality: Evidence from MINT countries. Journal of Environmental Management, 327, 116884.

Ali, A., Audi, M., & Roussel, Y. (2021). Natural resources depletion, renewable energy consumption and environmental degradation: A comparative analysis of developed and developing world. International Journal of Energy Economics and Policy, 11(3), 251-260.

Ali, A., Audi, M., Bibi, C., & Roussel, Y. (2021). The Impact of Gender Inequality and Environmental Degradation on Human Well-being in the Case of Pakistan: A Time Series Analysis. International Journal of Economics and Financial Issues, 11(2), 92-99.

Alvarado, R., & Toledo, E. (2017). Environmental degradation and economic growth: evidence for a developing country. Environment, Development and Sustainability, 19, 1205-1218.

Audi, M., & Ali, A. (2023). Unveiling the Role of Business Freedom to Determine Environmental Degradation in Developing Countries. International Journal of Energy Economics and Policy, 13(5), 157-164.

Audi, M., Poulin, M., Ahmad, K., & Ali, A. (2025). Modeling disaggregate globalization to carbon emissions in BRICS: A panel quantile regression analysis. Sustainability, 17(6), 2638.

Battiston, S., Dafermos, Y., & Monasterolo, I. (2021). Climate risks and financial stability. Journal of Financial Stability, 54, 100867.

Chen, G., Zhuoma, L., Xie, X., & Xu, Z. (2024). The impact of natural resource markets and green financing on financial stability and renewable energy investment efficiency. Geological Journal, 59(1), 245-259.

Collins, C. J. (2022). Expanding the resource based view model of strategic human resource management. In Strategic Human Resource Management and Organizational Effectiveness (pp. 107-134). Routledge.

D’Orazio, P., & Popoyan, L. (2019). Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?. Ecological Economics, 160, 25-37.

Dikau, S., & Volz, U. (2021). Central bank mandates, sustainability objectives and the promotion of green finance. Ecological economics, 184, 107022.

Fauzia, L. R., & Trinugroho, I. (2022). The Financial Inclusion-Environmental Quality Nexus: Do Information and Communication Technologies Make a Difference?. International Journal of Business and Society, 23(3), 1588-1599.

Freeman, R. E., Dmytriyev, S. D., & Phillips, R. A. (2021). Stakeholder theory and the resource-based view of the firm. Journal of management, 47(7), 1757-1770.

Gorus, M. S., & Aslan, M. (2019). Impacts of economic indicators on environmental degradation: evidence from MENA countries. Renewable and Sustainable Energy Reviews, 103, 259-268.

Hafeez, M., Chunhui, Y., Strohmaier, D., Ahmed, M., & Jie, L. (2018). Does finance affect environmental degradation: evidence from One Belt and One Road Initiative region? Environmental Science and Pollution Research, 25, 9579-9592.

Hamid, S., Ijab, M. T., Sulaiman, H., Md. Anwar, R., & Norman, A. A. (2017). Social media for environmental sustainability awareness in higher education. International Journal of Sustainability in Higher Education, 18(4), 474-491.

Hung, N. T. (2023). Green investment, financial development, digitalization and economic sustainability in Vietnam: Evidence from a quantile-on-quantile regression and wavelet coherence. Technological Forecasting and Social Change, 186, 122185.

Ibrahim, J., & Simian, R. (2023). Investigating CO2 Emissions Drivers: Energy Use, Economic Growth, Urbanization, and Trade Openness. Journal of Energy and Environmental Policy Options, 6(1), 1-7.

Jadoon, I. A., Mumtaz, R., Sheikh, J., Ayub, U., & Tahir, M. (2021). The impact of green growth on financial stability. Journal of Financial Regulation and Compliance, 29(5), 533-560.

James, P., & Emons, M. (2023). Analyzing the Impact of Economic Factors on the US Commercial Electricity Consumption. Journal of Energy and Environmental Policy Options, 6(2), 17-22.

Khalid, F., Su, C. Y., Weiwei, K., Voinea, C. L., & Srivastava, M. (2025). Financial mechanism for sustainability: the case of China’s green financial system and corporate green investment. China Finance Review International, 15(1), 93-116.

Khan, K. A., Anser, M. K., Pala, F., Barut, A., & Zafar, M. W. (2024). Promoting sustainability in developing Countries: A Machine Learning-based approach to understanding the relationship between green investment and environmental degradation. Gondwana Research, 132, 136-149.

Khan, M., & Yoon, S. M. (2021). Financial instability and environmental degradation: a panel data investigation. Applied Economics, 53(54), 6319-6331.

Kibritcioglu, A. (2023). Financial Development and Energy Consumption Dynamics in Turkey. Journal of Energy and Environmental Policy Options, 6(2), 1-8.

Kirikkaleli, D., & Sofuoğlu, E. (2023). Does financial stability matter for environmental degradation? Geological Journal, 58(9), 3268-3277.

Kirikkaleli, D., Castanho, R. A., Genc, S. Y., Oyebanji, M. O., & Couto, G. (2022). The asymmetric and long-run effect of financial stability on environmental degradation in Norway. Sustainability, 14(16), 10131.

Korzh, N., Mostenska, T., & Bilan, Y. (2017). Resource-based view in managing financial component of corporate capital. Polish journal of management studies, 16(2), 133-146.

Kumar, P., & Wu, H. (2025). Evaluating the Dual Impact of Economic Drivers on Environmental Degradation in Developing Countries: A Study of Technology Innovation, Foreign Direct Investment, and Trade Openness. Journal of Energy and Environmental Policy Options, 8(1), 24-36.

Lee, S., & Chen, G. (2022). Understanding financial resilience from a resource-based view: Evidence from US state governments. Public Management Review, 24(12), 1980-2003.

Li, Q., Zeng, F. E., Liu, S., Yang, M., & Xu, F. (2021). The effects of China's sustainable development policy for resource-based cities on local industrial transformation. Resources Policy, 71, 101940.

Li, S., Yu, Y., Jahanger, A., Usman, M., & Ning, Y. (2022). The impact of green investment, technological innovation, and globalization on CO2 emissions: evidence from MINT countries. Frontiers in Environmental Science, 10, 868704.

Malik, A. H., Jais, M. B., Md Isa, A. H., & Rehman, A. U. (2022). Role of social sustainability for financial inclusion and stability among Asian countries. International Journal of Social Economics, 49(9), 1324-1348.

Malik, A. H., Jais, M. B., Rahim, S., Rehman, A. U., & Khalid, S. (2023). Significance of environmental sustainability to maintain financial stability: mediating roles of financial inclusion. Asia-Pacific Journal of Regional Science, 7(4), 1307-1328.

Marc, A., & Ali, A. (2018). Determinants of Environmental Degradation under the Perspective of Globalization: A Panel Analysis of Selected MENA Nations (No. 85776). University Library of Munich, Germany.

Marc, A., Ahmad, K., Poulin, M., & Ali, A. (2025). Different Dimensions of Globalization and CO. International Journal of Energy Economics and Policy, 15(3), 553-566.

Ozili, P. K. (2022). Financial inclusion and sustainable development: an empirical association. Journal of Money and Business, 2(2), 186-198.

Pera, J. (2017). An enterprise’s financial stability and its sustainable growth. A risk-based perspective. International entrepreneurship review, 3(2), 49.

Przybytniowski, J. (2018). Economic knowledge and awareness and the competence of the young generation of the Świętokrzyskie Voivodeship in the achievement of financial stability. Annals of Marketing Management & Economics, 4(1), 89-99.

Qamri, G. M., Sheng, B., Adeel-Farooq, R. M., & Alam, G. M. (2022). The criticality of FDI in Environmental Degradation through financial development and economic growth: Implications for promoting the green sector. Resources Policy, 78, 102765.

Ren, S., Hao, Y., & Wu, H. (2022). How does green investment affect environmental pollution? Evidence from China. Environmental and Resource Economics, 81, 25-51.

Safi, A., Chen, Y., Wahab, S., Ali, S., Yi, X., & Imran, M. (2021). Financial instability and consumption-based carbon emission in E-7 countries: the role of trade and economic growth. Sustainable Production and Consumption, 27, 383-391.

Sajid, M., Ansari, M. A. A., Tanveer, A., Faheem, M., & Waseem, A. (2023). Evaluating the influence of green growth, institutional quality and financial inclusion on financial stability: evidence by sustainable finance theory. Environmental Science and Pollution Research, 30(54), 115965-115983.

Semenkova, E., & Andrianova, L. (2020). Environmental awareness and development of the financial market. In E3S Web of Conferences (Vol. 164, p. 09043). EDP Sciences.

Senturk, I. (2023). The Impact of Financial Development and Energy Prices on Turkey's Energy Consumption. Journal of Energy and Environmental Policy Options, 6(1), 24-29.

Shahbaz, M., Nasir, M. A., & Roubaud, D. (2018). Environmental degradation in France: the effects of FDI, financial development, and energy innovations. Energy economics, 74, 843-857.

Sharma, R., & Das, V. (2024). A Review of Sustainable Agriculture and Renewable Energy Pathways for Reducing Environmental Degradation. Journal of Energy and Environmental Policy Options, 7(3), 14-22.

Skhirtladze, S., & Nurboja, B. (2019). Exploring the environmental Kuznets curve hypothesis: Deforestation, trade, and economic growth in Pakistan. Journal of Energy and Environmental Policy Options, 2(2), 48-56.

Smets, F. (2018). Financial stability and monetary policy: How closely interlinked? 35th issue (June 2014) of the International Journal of Central Banking.

Solarin, S. A., & Al-Mulali, U. (2018). Influence of foreign direct investment on indicators of environmental degradation. Environmental Science and Pollution Research, 25, 24845-24859.

Sun, Y., Guan, W., Razzaq, A., Shahzad, M., & An, N. B. (2022). Transition towards ecological sustainability through fiscal decentralization, renewable energy and green investment in OECD countries. Renewable Energy, 190, 385-395.

Svartzman, R., Bolton, P., Despres, M., Pereira Da Silva, L. A., & Samama, F. (2021). Central banks, financial stability and policy coordination in the age of climate uncertainty: A three-layered analytical and operational framework. Climate Policy, 21(4), 563-580.

Thi Xuan, H., & Thai Hung, N. (2024). Does green investment mitigate environmental degradation in Vietnam: the time-frequency effect of nonrenewable energy investment and globalization? Management of Environmental Quality: An International Journal, 35(5), 1005-1027.

Toth, P., & Paskal, D. (2019). Role of Energy R&D in Shaping the Environmental Kuznets Curve Among OECD Countries. Journal of Energy and Environmental Policy Options, 2(1), 11-17.

Wahab, S., Imran, M., Safi, A., Wahab, Z., & Kirikkaleli, D. (2022). Role of financial stability, goals in BRICS countries. Environmental Science and Pollution Research, 29(32), 48827-48838.

William, C., & Lipman, E. (2021). Energy-Efficient Practices in Reinforcing Steel Activities During Construction. Journal of Energy and Environmental Policy Options, 4(3), 21-27.

Willy, R. (2018). The role of economic growth, foreign direct investment in determining environmental degradation: A panel data analysis. Journal of Energy and Environmental Policy Options, 1(4), 96-102.

Yousaf, I., Suleman, T., & Demirer, R. (2022). Green investments: a luxury good or a financial necessity? Energy Economics, 105(105745).

Zenios, A. (2024). Financial Globalization, Environmental Degradation, and Energy Consumption in ASEAN: An Empirical Analysis. Journal of Energy and Environmental Policy Options, 7(4), 1-8.