This study aims to explore the impact of financial institutions and financial markets on CO2 emissions, across three different subcomponents – depth, access and efficiency of the financial sector at country level for BRICS+ nations. Furthermore, it examines the moderating role of green finance in this relationship.
This study uses fixed effects model with Driscoll-Kraay Standard Errors to estimate the impact of financial sector on CO2 emissions across a balanced panel of BRICS+ nations during 2003–2021. Further, FMOLS technique is used to assess robustness.
The access and efficiency of financial institutions are found to drive CO2 emissions while depth is seen to minimize emissions. Contrarily, financial markets are associated with reduced emissions. However, overall financial development still correlates with rising emissions, which may be attributed to the dominance of financial institutions over financial markets in BRICS+. Green finance, which facilitates sustainable investments, significantly offsets these effects, both directly and as a moderator.
This study advocates greater emphasis on strengthening financial markets to mitigate the CO2 emissions linked to the dominance of financial institutions. Policymakers should prioritize expanding the range of sustainability-linked financial products in capital markets.
This study uniquely distinguishes the effects of financial institutions and financial markets with their subcomponents – depth, access and efficiency, to examine their individual impact on CO2 emissions. It also evaluates the overall effect of financial development and the moderating role of green finance, offering a more comprehensive understanding of the financial system’s dynamic linkage with environmental outcomes.
