Does environmental policy stringency promote financial development? New policy insights from BRICS countries

Purpose - Over the past few decades, BRICS nations have implemented several environmental legislations to combat environmental issues, along with the development of the financial sector. However, they still face the dual challenge of balancing financial development (FD) and reducing carbon emissions to achieve sustainable development. Hence, this study aims to explore how environmental policy stringency (EPS) influences FD in BRICS nations from 1993 to 2020. Design/methodology/approach - The authors performed a panel data analysis to examine the effect of the EPS on FD. Firstly, they conducted a panel unit root test using the Levin–Lin–Chu and the Im–Pesaran–Shin unit root tests to check the stationarity of the data. Then, they used the fixed effect model for analysis. A feasible generalised least squares test is used to ensure the robustness of the results. Findings - The EPS positively affects FD through financial markets and intuitions in BRICS nations, indicating that more stringent environmental policies of BRICS countries promote FD in these nations. Practical implications - This study suggests that policymakers in BRICS nations should consider strengthening EPS, implying the dual benefit of aligning environmental sustainability goals with economic growth. Originality/value - This study provides a deeper understanding by disassembling FD into financial markets and institutions, thereby establishing a nuanced relationship with EPS, which is highly relevant for addressing the distinctive financial systems and environmental challenges of BRICS nations. Therefore, this study fills this gap and offers new insights into the relationship between EPS and FD in these nations.