Do Foreign Direct Investment and Financial Development Escalate Environmental Degradation? Heterogeneous Panel Data Analysis in G-7 Countries

This study aims to explore the effect of financial development and foreign direct investment on the environment for G-7 countries, which are among the most polluting countries. The linkage between the relevant variables in these countries, which shape world trade and financing on a global scale, is crucial in determining environmental effects. In the study, energy consumption and economic growth, which can also have an impact on the environment, are considered and analyzed for 1990-2021, a period of intense globalization. After preliminary analysis for cross-sectional dependence and heterogeneity, Westerlund (2006) cointegration test and AMG and CCE panel data estimation methods are utilized. The results show that financial development and foreign direct investment mitigate environmental degradation for the panel. Country-specific results show that the drivers of environmental degradation diverge across the G-7 countries. The share of renewable energy in energy consumption should be increased, and investments should be directed towards this area. Environmental quality should be improved through the injection of capital into green finance and sustainability in financial markets.