Ecological Reflections of Turkey’s Financial Development: An Evaluation on Foreign Direct Investment and Domestic Credit

Financial development, which is an important driver of economic growth, also has critical impacts on environmental sustainability. This study takes a holistic approach to examining the environmental consequences of financial development through the ecological footprint indicator, which represents the ecological capacity required for the continuity of an economy. The Global Footprint Network states the ecological footprint must be below 1.5 gha to protect biodiversity. However, in 2022, Turkey’s per capita footprint was 2.58 gha. This shows its way of life isn’t sustainable, so policymakers need action plans based on solid data. Within this framework, the main objective of this study is to empirically examine the causal relationship between domestic loans, which are an indicator of financial depth, and foreign direct investment, which represents financial openness, in order to provide a more comprehensive perspective on the environmental impacts of financial development. The Toda-Yamamoto causality analysis was applied in the study covering the period 1985-2022. According to the analysis results, a two-way causal relationship was found between the ecological footprint and direct foreign investment, while a one-way causal relationship was identified between domestic loans and the ecological footprint. These findings show that both the national financial system and international capital flows have a direct impact on Turkey's environmental performance. The study's results emphasize that if the capital accumulation provided through these channels is directed toward environmentally conscious investment areas, it can give the financial development process a dynamic momentum focused on sustainability.