Financial development and environmental sustainability in Nigeria: Does institutional environment matter?

Abstract

Environmental sustainability has become a global agenda that every country strives to attain to promote prosperity and intergenerational wealth for the enhancement of human welfare and survival. It is against this backdrop that this study explores the effect of financial development on environmental sustainability as well as the moderating role of institutional quality on the nexus between the two variables. The study applies autoregressive distributed lags (ARDL) as the primary estimation technique while fully modified OLS and canonical cointegration regression are employed as robustness checks on the parameter estimates on annual data between 1986 and 2020. The study finds evidence of cointegration between environmental sustainability indicators and financial development. The outcomes from the baseline models suggest that financial development and weak institutional quality deteriorate environmental performance both in the short run and long run periods. However, additional findings from the paper affirm that institutional quality and financial development complement each other in promoting environmental sustainability in Nigeria. The results are consistent for the two indicators of environmental sustainability and robust to different estimation techniques. The study concludes that institutional quality plays a fundamental role by stimulating the favourable effect of financial development on environmental quality.