From profit to preservation: how business climate shapes environmental degradation in developing economies

Climate change remains a significant challenge for the global economy. Despite the growing number of studies exploring various facets of climate change, the impact of the business climate –the broader economic environment in which firms operate – remains underexamined. This research examines how the business climate influences environmental degradation across subpanels of 112 developing countries. Using dynamic panel threshold regression, we identify a non-linear, inverted U-shaped relationship between the business climate and environmental degradation. To address issues such as collinearity, spatial dependence, and heteroscedasticity, we explore how variations in climate-resilient governance reforms yield diverse environmental outcomes. Our results suggest that, while an improving business climate can initially reduce environmental degradation, it may, over time, contribute to environmental harm. The findings emphasise the importance of policies that combine business-friendly reforms with robust institutional quality and environmental governance to minimise ecological damage and foster sustainable economic growth in developing nations.