To align the financial system with environmental sustainability, government intervention is essential. While the relationship between financial development and environmental quality has been extensively explored, the moderating role of government intervention in this nexus has often been overlooked. Therefore, this study examines how government intervention influences the environmental outcomes of financial development in the Australian context during the period of 1999–2021. Unlike previous studies that focus primarily on institutional quality, this research investigates government intervention, measured using a composite index developed for the present analysis. This empirical study employs the Autoregressive Distributed Lag (ARDL) approach, with Fully Modified Ordinary Least Squares (FMOLS) used for robustness testing. The main empirical findings reveal that financial system development adversely affects environmental quality by increasing toxic emissions. However, in Australia, government intervention plays a significant role in improving environmental quality. Notably, the results indicate that government intervention effectively mitigates the detrimental environmental impact of financial system growth. Furthermore, the analysis indicates that the control variables, namely energy consumption and economic growth, exert a significant influence on exacerbating environmental degradation in Australia. These findings underscore the necessity of targeted government interventions in the financial system to confirm that financial growth aligns with environmental sustainability objectives.
Wijethunga et al. (Sun,) studied this question.