Achieving sustainability: Unravelling the role of financial development and foreign direct investment in sub‐Saharan Africa

Abstract

As the global community grapples with sustainable development, sub‐Saharan Africa (SSA) faces a critical dilemma in balancing economic growth and environmental preservation. The study examines the effect of financial development (foreign direct investment [FDI]) on CO2 emissions in achieving sustainability in SSA. The study employed fully modified ordinary least square (FMOLS) and dynamic ordinary least square (DOLS) cointegration approaches, to establish substantial connections between key variables. The results showed that environmental taxes and FDI play a role in reducing carbon emissions. Trade openness, natural resource rent, and consumption cause carbon emissions to rise. Furthermore, the study explores causation between variables using Dumitrescu–Hurling panel causality tests. A bidirectional causality exists between ecological footprint and CO2 emissions while a unidirectional causality exists between financial development, FDI, and CO2 emissions. The findings suggest the adoption of enhanced environmental taxation policies and the encouragement of sustainable FDI. We further recommend the introduction of green fiscal policies to stimulate renewable energy investments, promote responsible consumption and trade practices, and green innovative financing.