Investigation of the impact of green finance on environmental pollution in E-7

This study aims to investigate the effects of green finance on environmental pollution in E-7 countries based on annual observations from 2000-2023. The analyses were conducted using second-generation panel data methods that consider inter-country interactions and structural differences. Accordingly, in this study, cross-sectional dependence and homogeneity tests were first performed, and the stationarity properties of the variables were tested using the CIPS panel unit root test. Then, the existence of long-term relationships was investigated using the Gengenbach et al. (2016) cointegration test, and long-term coefficients were obtained through the AMG (Augmented Mean Group) estimator. The empirical findings show that increases in green finance across the panel reduce carbon dioxide (CO2) emissions in the long term, revealing that green finance is a tool that supports environmental sustainability. In contrast, real gross domestic per capita and energy consumption per capita, included as control variables in the model, were found to have positive and statistically significant effects on CO2 emissions. These results indicate that economic growth and increasing energy demand in E-7 countries continue to exert environmental pressures. On the other hand, the negative and statistically significant effect of trade openness on CO2 emissions shows that economic globalization can support environmental sustainability through access to environmental efficiency and clean technologies. Country-specific AMG estimates, however, point to significant heterogeneity. The energy consumption variable exhibits a positive and statistically significant effect on CO2 emissions in all countries, indicating that dependence on fossil fuels remains a key determinant of environmental degradation. Regarding the green finance variable, a statistically significant and negative coefficient was obtained only for Indonesia. This finding suggests that green finance flows play an effective role in improving environmental quality in Indonesia. The statistically insignificant effect of green finance in other E-7 countries suggests that the effectiveness of these mechanisms may depend on country-specific institutional and structural factors. Finally, the economic growth coefficient was found to be statistically insignificant at the country level, while the trade openness variable yielded a significant positive effect on CO2 emission reduction only for Indonesia.