Pursuing the Carbon Neutrality Agenda: The Role of Financial Development, Foreign Direct Investment, and Effective Governance

Louis David Junior Annor (), Margarita Robaina, Elisabete Vieira and Jorge Mota
Additional contact information
Louis David Junior Annor: University of Aveiro
Margarita Robaina: University of Aveiro
Elisabete Vieira: University of Aveiro
Jorge Mota: University of Aveiro

The European Journal of Development Research, 2025, vol. 37, issue 3, No 8, 666-697

Abstract: Abstract This study examines the linear and non-linear effects of financial development (FD), foreign direct investment (FDI), and effective governance on environmental quality (EQ) in sub-Saharan Africa (SSA), using load capacity factor (LCF) and carbon (CO2) emissions as proxies. Focusing on 47 African economies for the period 1996–2021, data were sourced from the World Development Indicators, International Monetary Fund, World Governance Indicators, and Global Footprint Network. The two-step system generalized methods of moment estimation technique was employed to evaluate the interactions among the variables. The findings reveal that FD initially deteriorates LCF but improves it beyond a certain threshold (a U-shaped relationship), confirming the financial development load capacity curve hypothesis in SSA. However, this study found a U-shaped relationship between FD and CO2 emissions, suggesting a destructive effect of financial systems on environmental sustainability. Furthermore, FDI positively affects LCF but exacerbates CO2 emissions, supporting the pollution haven hypothesis. Additionally, governance effectiveness significantly promotes EQ by enforcing environmental regulations and overturning the negative effect of FD on the environment. This study found that urbanization promotes sustainability due to its positive effect on LCF. Unemployment negatively affects the environment (increases CO2 emissions), suggesting a stimulation of survival-driven resource exploitation in Africa. The findings underscore the importance of effective governance, sustainable urbanization, robust financial systems and environmentally conscious FDI in stimulating long-term environmental sustainability.

Keywords: Financial development; Environmental quality; Load capacity factor; Institutional quality; Foreign direct investments; Generalized methods of moment (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s41287-025-00696-7 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:eurjdr:v:37:y:2025:i:3:d:10.1057_s41287-025-00696-7

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/41287/PS2

DOI: 10.1057/s41287-025-00696-7

Access Statistics for this article

The European Journal of Development Research is currently edited by Spencer Henson and Natalia Lorenzoni

More articles in The European Journal of Development Research from Palgrave Macmillan, European Association of Development Research and Training Institutes (EADI) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().