Pursuing the Carbon Neutrality Agenda: The Role of Financial Development, Foreign Direct Investment, and Effective Governance

This study examines the linear and non-linear effects of financial development (FD), foreign direct investment (FDI), and effective governance on environmental quality (EQ) in sub-Saharan Africa (SSA), using load capacity factor (LCF) and carbon (CO2) emissions as proxies. Focusing on 47 African economies for the period 1996–2021, data were sourced from the World Development Indicators, International Monetary Fund, World Governance Indicators, and Global Footprint Network. The two-step system generalized methods of moment estimation technique was employed to evaluate the interactions among the variables. The findings reveal that FD initially deteriorates LCF but improves it beyond a certain threshold (a U-shaped relationship), confirming the financial development load capacity curve hypothesis in SSA. However, this study found a U-shaped relationship between FD and CO2 emissions, suggesting a destructive effect of financial systems on environmental sustainability. Furthermore, FDI positively affects LCF but exacerbates CO2 emissions, supporting the pollution haven hypothesis. Additionally, governance effectiveness significantly promotes EQ by enforcing environmental regulations and overturning the negative effect of FD on the environment. This study found that urbanization promotes sustainability due to its positive effect on LCF. Unemployment negatively affects the environment (increases CO2 emissions), suggesting a stimulation of survival-driven resource exploitation in Africa. The findings underscore the importance of effective governance, sustainable urbanization, robust financial systems and environmentally conscious FDI in stimulating long-term environmental sustainability.