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The Impact of Financial Stability on Environmental Degradation: Mediating Role of Green Investment and Moderating Role of Environmental Awareness

Author

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  • Naeem, Huzefa
  • Ali, Amjad
  • Audi, Marc

Abstract

This research investigates the influence of financial development on environmental outcomes, with green investment as a mediating variable and environmental awareness as a moderating factor. To achieve this, the authors employ a mixed-methods approach, analyzing long-term panel data from thirty countries and supplementing quantitative findings with stakeholder interviews conducted in Germany and India, thereby enriching the analysis with diverse perspectives. Financial development is measured by indicators such as gross domestic product growth and banking sector strength, while environmental degradation is proxied by per capita carbon dioxide emissions. Green investment is assessed by comparing renewable energy financing to gross domestic product, and the level of environmental awareness is gauged by the extent to which populations prioritize ecological concerns. The findings reveal that financial stability contributes to reduced environmental harm, with green investment serving as a significant channel for this effect. Moreover, heightened environmental awareness amplifies the positive impact of financial stability on green investment. The analysis indicates that regions characterized by both financial stability and a well-informed public are more successful in transitioning to clean energy, whereas emerging economies encounter greater obstacles due to insufficient support systems and the inherent challenges of simultaneous development. The study concludes that robust financial systems alone are insufficient to deliver ecological benefits; meaningful progress requires a combination of green investment and active public engagement. Policymakers are advised to formulate climate-responsive financial regulations, invest in public awareness campaigns, and devise context-specific strategies tailored to cultural differences to advance both environmental protection and economic development. By elucidating the role of awareness in fostering sustainable transformation, this research contributes to the literature on the Environmental Kuznets Curve and stakeholder theory, offering practical recommendations for aligning global economic activity with ecological boundaries.

Suggested Citation

  • Naeem, Huzefa & Ali, Amjad & Audi, Marc, 2025. "The Impact of Financial Stability on Environmental Degradation: Mediating Role of Green Investment and Moderating Role of Environmental Awareness," MPRA Paper 127490, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:127490
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    References listed on IDEAS

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    2. Arsalan Haneef Malik & Mohamad bin Jais & Shafinah Rahim & Awais Ur Rehman & Shahzeb Khalid, 2023. "Significance of environmental sustainability to maintain financial stability: mediating roles of financial inclusion," Asia-Pacific Journal of Regional Science, Springer, vol. 7(4), pages 1307-1328, December.
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    6. Peterson K. Ozili, 2022. "Financial inclusion and sustainable development: an empirical association," Journal of Money and Business, Emerald Group Publishing Limited, vol. 2(2), pages 186-198, September.
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    8. Audi, Marc & Ali, Amjad, 2018. "Determinants of Environmental Degradation under the Perspective of Globalization: A Panel Analysis of Selected MENA Nations," MPRA Paper 85776, University Library of Munich, Germany.
    9. Amjad Ali & Marc Audi & Chan Bibi & Yannick Roussel, 2021. "The Impact of Gender Inequality and Environmental Degradation on Human Well-being in the Case of Pakistan: A Time Series Analysis," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 11(2), pages 92-99.
    10. Amjad Ali & Marc Audi & Yannick Roussel, 2021. "Natural Resources Depletion, Renewable Energy Consumption and Environmental Degradation: A Comparative Analysis of Developed and Developing World," International Journal of Energy Economics and Policy, International Journal of Energy Economics and Policy, vol. 11(3), pages 251-260.
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    12. Dervis Kirikkaleli & Rui Alexandre Castanho & Sema Yilmaz Genc & Modupe Oluyemisi Oyebanji & Gualter Couto, 2022. "The Asymmetric and Long-Run Effect of Financial Stability on Environmental Degradation in Norway," Sustainability, MDPI, vol. 14(16), pages 1-15, August.
    13. Faisal Abbas, 2024. "Financial instability and environmental degradation: Evidence from South Asia," Energy & Environment, , vol. 35(7), pages 3785-3802, November.
    14. Marc Audi & Marc Poulin & Khalil Ahmad & Amjad Ali, 2025. "Modeling Disaggregate Globalization to Carbon Emissions in BRICS: A Panel Quantile Regression Analysis," Sustainability, MDPI, vol. 17(6), pages 1-24, March.
    15. Rafael Alvarado & Elisa Toledo, 2017. "Environmental degradation and economic growth: evidence for a developing country," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 19(4), pages 1205-1218, August.
    16. Arsalan Haneef Malik & Mohamad Bin Jais & Abu Hassan Md Isa & Awais Ur Rehman, 2022. "Role of social sustainability for financial inclusion and stability among Asian countries," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 49(9), pages 1324-1348, April.
    17. Shahbaz, Muhammad & Nasir, Muhammad Ali & Roubaud, David, 2018. "Environmental degradation in France: The effects of FDI, financial development, and energy innovations," Energy Economics, Elsevier, vol. 74(C), pages 843-857.
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    Citations

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    Cited by:

    1. Fatima, Mishal & Audi, Marc & Ali, Amjad, 2026. "Nexus Among Financial Risks and Financial Performance: A Moderating Role of Corporate Governance," MPRA Paper 128921, University Library of Munich, Germany.
    2. Javed, Harris & Audi, Marc & Ali, Amjad, 2026. "Corporate Governance and Sustainability Disclosure: An Empirical Analysis of Environmental Reporting Practices," MPRA Paper 129204, University Library of Munich, Germany.
    3. Marc Audi & Amjad Ali & Marc Poulin, 2026. "Modelling Urban Expansion, Energy Consumption, and Environmental Sustainability: The Moderating Role of Environmental Taxes in Developing Countries," Sustainability, MDPI, vol. 18(9), pages 1-24, May.
    4. Choudhary, Shamsher & Ali, Amjad & Audi, Marc, 2026. "The Relations between Internal Controls, Corporate Governance, and the Credibility of Post-Issuance Disclosures of Green Finance: Evidence using Issuer-Level Panel Data," MPRA Paper 128864, University Library of Munich, Germany.
    5. Daud, Ataullah & Jadoon, Atif Khan & Ali, Amjad & Audi, Marc, 2026. "Green Finance Regulations and Disclosure Effectiveness: The Role of Governance and Enforcement Capacity," MPRA Paper 129351, University Library of Munich, Germany.
    6. Majeed, Rafaqat & Audi, Marc & Ali, Amjad, 2026. "Environmental, Social, and Governance Reporting and Financial Reporting Quality in Emerging Markets," MPRA Paper 129347, University Library of Munich, Germany.
    7. Rauf, Saima & Audi, Marc & Ali, Amjad, 2026. "Liquidity Risk Management in the Perspective of Asset Quality, Loan Quality & Governance: A Case Study of Pakistan Banking Industry," MPRA Paper 128920, University Library of Munich, Germany.

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