Impact of financial inclusion on environmental pollution – evidence from developing countries

Abstract This study aims to examine the impact of financial inclusion on environmental pollution in developing countries, thereby addressing whether financial inclusion contributes to environmental improvement or exacerbates pollution. Based on a panel dataset of 62 developing countries from 2005 to 2022, the study employs the system Generalized Method of Moments (SGMM) estimator to address endogeneity issues and ensure the robustness of the results. The empirical findings reveal a nonlinear relationship between financial inclusion and environmental pollution, with a threshold identified at 0.331. Specifically, expansion tends to increase pollution at lower levels of financial inclusion; however, once financial inclusion surpasses the threshold, its impact becomes positive, helping to improve environmental quality. Furthermore, the study highlights the moderating role of national characteristics, such as income level and participation in the Paris Agreement. In upper-middle-income countries and those that have signed the Paris Agreement, financial inclusion is found to have a positive influence on environmental outcomes. In contrast, financial inclusion tends to aggravate pollution in lower-income countries or those not party to the Paris Agreement. These findings enhance the academic understanding of the finance-environment nexus and provide valuable empirical evidence to support the design of sustainable and environmentally friendly financial inclusion policies.