Towards Sustainable Development: Drivers From Financial and Institutional Development

The increasing challenges posed by climate change have highlighted the need for a global commitment to sustainable development (SD), as the world faces the consequences of a “brown economy.” Achieving SD requires a holistic approach that balances social, economic, and environmental dimensions. Financial development (FD) plays a crucial role in funding projects and activities related to SD. Previous research has primarily focused on economic and environmental aspects of SD, without exploring how institutional quality moderates the relationship between FD and SD. This study investigates the impact of FD on SD by considering the role of institutional quality (IQ) in 116 countries from 2004 to 2022. Using statistical techniques such as threshold and Bayesian regression, the study finds that FD has a positive effect on SD in countries with strong institutions (IQ > 1.012), while it has a negative effect in countries with weak institutions (IQ < 1.012). These results highlight the importance of institutional quality in optimizing the benefits of FD for SD. In countries with strong institutions, financial resources can be directed towards sustainable sectors like renewable energy, education, and healthcare, leading to comprehensive economic, social, and environmental development. In contrast, in countries with weak institutions, FD may contribute to corruption in SD-related projects or environmental pollution, hindering the achievement of SD goals.