Environmental pollution, innovation, and financial development: an empirical investigation in selected industrialized countries using the panel ARDL approach

The Paris Accord emphasizes the obligation of nations to contribute to Nationally Determined Contributions and mitigate environmental pollution. Consequently, countries worldwide are actively seeking to discern the influence of various factors on improving environmental quality. Among these factors, innovation and financial sector development are indispensable in curtailing environmental pollution. Employing panel data from 1996 to 2018, we investigate the tripartite relationship between environmental pollution, innovation, and financial development within the G-20 countries. The findings of this study reveal that both innovation and financial development contribute to reducing environmental pollution in the long term. However, no significant relationship is observed in the short term between innovation, financial development, and environmental pollution. To further explore these dynamics, we conduct separate analyses for each country to examine the connection between innovation, financial development, and environmental pollution. Our results indicate that the short-term impact of innovation varies considerably across most G-20 countries. Nonetheless, in the long term, enhanced innovation catalyzes diminishing environmental pollution. These findings underscore the significance of innovation as a pivotal factor in alleviating environmental pollution through innovations in products, processes, and technologies. Similarly, financial sector development plays a vital role in promoting environmental quality by facilitating initiatives such as green lending and supporting research on green technologies and renewable energy solutions. Consequently, countries should reassess their policies and take proactive measures to address and mitigate environmental pollution effectively.