Environmental Degradation and Financial Development Nexus in BRICS PLUS Countries: Do Financial Development Drivers Make a Difference?

The BRICS group is striving to create a new economic and financial paradigm, thereby heightening the importance of financial issues among its members. This group has recently expanded to include new members, some of whom are among the top ten producers of fossil fuels, while others are densely populated. As a result, the BRICS nations face increased challenges and responsibilities regarding environmental degradation. Given this context, it is crucial to evaluate the influence of financial development and its main drivers on environmental outcomes. To achieve this, we have categorized the financial development drivers into three groups: economic, institutional, and productivity-related factors. We then explored how financial development interacts with environmental degradation, with a particular focus on the role of these drivers as effective moderators within the expanded BRICS group. Our analysis uses the cross-sectional autoregressive distributed lag (CS-ARDL) methodology for a period spanning from 2000 to 2021. The empirical results show that in all cases, the interaction between financial development and its drivers reduces CO2 emissions. This interaction benefits from the direct negative effect of financial development. For instance, the interaction between economic growth or capital formation and financial development improves environmental quality, reversing the initially positive direct effect of these factors on emissions. Moreover, for other factors-such as trade openness, government expenditure, control of corruption, human development, and technological innovation-their interaction with financial development creates a synergy that enhances their initially positive direct effect on emission reduction, except for trade openness, which initially had no significant effect. Based on our empirical findings, we have formulated several policy recommendations to address these issues.