Does financial development alter the ecological effects of foreign direct investment?

Sustainable development is a core component of building a community with a shared future for mankind. However, the increasing ecological footprint presents a serious challenge, particularly in the Asia-Pacific Economic Cooperation (APEC) region, where rapid economic growth coexists with substantial cross-border capital inflows. Using panel data from 45 APEC economies over the period 2000–2024, this study examines how financial development moderates the environmental impact of foreign direct investment (FDI). The ecological footprint serves as a comprehensive indicator of environmental pressure, while the IMF’s Financial Development Index captures the sophistication of financial systems. The results show that FDI significantly increases the ecological footprint of APEC economies, supporting the pollution haven hypothesis. This finding remains robust after outlier trimming, lagged effect analysis, and subsample tests. Mechanism analysis reveals that FDI undermines energy sustainability by reducing the share of renewable electricity and increasing energy intensity, thereby exacerbating ecological degradation. Financial development plays a significant negative moderating role: in economies with more advanced financial systems, the positive effect of FDI on the ecological footprint is reduced by 83.33 %. Heterogeneity analysis further indicates that the environmental risks of FDI are more pronounced in coastal, high-income, and technologically advanced economies, but are insignificant in landlocked, low-income, and less technologically developed countries. These findings suggest that strengthening green finance and integrating environmental risks into investment decisions can help align FDI more closely with ecological sustainability.