Received: 2 April 2024 Revised: 18 August 2024 Accepted: 2 September 2024

DOI: 10.1002/sd.3192

RESEARCH ARTICLE

Transition toward a sustainable future: Exploring the role

of green investment, environmental policy, and financial
development in the context of load capacity factor in
G-7 countries

Aamir Javed 1 | Mahjabeen Usman 2 | Agnese Rapposelli 1

1
Department of Economic Studies,
“G.d' Annunzio” University of Chieti-Pescara, Abstract
Pescara, Italy
Environmental sustainability holds evident significance since it is intricately
2
Department of Business Administration,
International Islamic University, Islamabad,
connected with attaining sustainable development. However, the pre-requisite of
Pakistan ecological sustainability is the higher ratio of biodiversity to ecological footprint,

Correspondence
called the Load Capacity Factor (LCF). Literature is quite scant on the drivers of LCF
Aamir Javed, Department of Economic Studies, and the study in hand is the attempt to find the viable policy instruments of this
“G.d' Annunzio” University of Chieti-Pescara,
Pescara, Italy.
important sustainability indicator. For this purpose, the study has explored the role of
Email: [email protected] green investment (GI), environmental policy (EP), financial development (FD), and nat-
ural resources rent (NRR) in the context of the load capacity curve (LCC) hypothesis
for G-7 countries from 1990 to 2019. Considering the co-dependence among econo-
mies, the study has employed a Cross-sectional Dependence Autoregressive Distrib-
utive Lag (CS-ARDL) technique to investigate the impact of each variable along with
other econometric techniques. The observed outcomes suggest that green invest-
ment and environmental policy stringency both contribute to improving environmen-
tal quality by increasing LCF. Whereas financial development and natural resources
rent significantly, reduce the LCF and enhance environmental degradation. Addition-
ally, the findings also validate the LCC hypothesis in the G-7 context. The study
advocates the need for green investment and policy stringency to achieve ecological
sustainability and adequate consideration to transform financial development toward
sustainability. Finally, the study has presented in-depth ecological solutions so that
G-7 economies can take possible action to acquire the targets set in COP26.

KEYWORDS
CS-ARDL, environmental policy stringency, financial development, green investment, load
capacity factor, natural resources, sustainable development

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,
provided the original work is properly cited.
© 2024 The Author(s). Sustainable Development published by ERP Environment and John Wiley & Sons Ltd.

Sustainable Development. 2024;1–21. wileyonlinelibrary.com/journal/sd 1

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2 JAVED ET AL.

1 | I N T RO DU CT I O N environmental-related R&D and technologies (Sun, Usman,

et al., 2023). Notably, some studies have reported the negative impact
Ecological degradation and climate change have become a constant of renewable energy sources on environmental quality (Shah
threat to sustainable development. Tremendous economic growth in et al., 2020; Mahmud et al., 2020). Therefore, it is of utmost impor-
past decades is backed by rapid industrialization and the consumption tance to invest in renewable energy technologies to make renewable
of fossil fuels, resulting in the major climate shift and resource energy a green source of energy resources. So, R&D investment and
inequality. So, a major policy shift is required to drive economic development in environmental-related technologies are the prerequi-
growth to save the planet for coming generations (Jiakui et al., 2023; site for clean energy (SDG7) and climate actions (SDG13). Therefore,
Shu et al., 2023). Considering this, world leaders are making interna- governments are allocating more budget to R&D activities and green
tional frameworks and agreements about climate change at a global environmental-related technologies, accumulatively called green
level, including the Sustainable Development Goals (SDGs), the Paris investments to halt environmental issues (Pata et al., 2023). The
Agreement, and the 26th Conference of the Parties to the United accords of the COP26 summit recognize the importance of green
Nations Framework Convention on Climate Change (COP26). The cer- credit availability and emphasize the need to enhance financial collab-
tain objectives set to be met by the COP26 summit include attaining oration among the pledged partners (Bai et al., 2023). However, the
global “Net Zero” emissions by the year 2050, ensuring that the global literature provides confusing and scant evidence on the role of finan-
temperature remains below 1.5 degrees Celsius, safeguarding natural cial development and green investment and how these important
habitats, mobilizing sustainable finance, and fostering international policy choices affect this newly debated notion of sustainability. Con-
cooperation (IEA, 2021a, 2021b). Nevertheless, the latest report on versely, G-7 economies have a long history of withstanding the United
the Sustainable Development Goals for the year 2022 reveals that Nations' sustainable goals and falling short of achieving these goals.
several economically developed countries, even those belonging to So, under SDG 7 of Clean Energy and SDGs 13, 14, and 15, air, water,
the G-7 economies, are failing to meet the objectives (World and soil pollution and the natural capacity to absorb this pollution
Bank, 2022). Here the question arises of the viability and effective- must be assessed concurrently. So, analyzing load capacity factor
ness of famous policy choices of green research and developments, (LCF) for G-7 countries has offered crucial directions to reach these
environmental regulations, and financial efficacy in controlling envi- goals, requiring stringency to carefully formulate and implement
ronmental damages and pushing sustainability limits. environmental policies.
The financial industry has been a crucial driver of economic and Environmental regulations and stringent environmental policies
human growth. At a global level, it facilitates the efficient use of funds (EP) are instrumental in harnessing different pro-environmental strate-
and enhances livelihoods through strategic investment. Recently, gies. Environmental policy stringency can refer to the explicit or
there has been an increased emphasis within the financial industry to implicit cost of engaging in ecologically hazardous behavior, for exam-
allocate financial resources to the sustainable practices and preserva- ple, pollution and deforestation (OECD, 2016). Governments of differ-
tion of natural resources technically called “green investments” (Sun ent countries are trying to tackle environmental issues through
et al., 2022). The emergence of green markets can be attributed to “sticks” (carbon pricing and taxing, etc.) and “carrots” (subsidies and
the pressing necessity to confront ecological issues. Development in tax reliefs on green activities) by rigorously increasing the stringency
financial markets and institutions promotes clean and affordable of environmental policies (OECD, 2016). The climate actions and
energy, which reduces the ecological load of the earth (Alsagr, 2023). policies measurement framework (CAPMF) database provides infor-
Further, investment in research and development (R&D) activities is mation on the climate policy adaptations of pledged countries on vari-
crucial for creating novel and efficient approaches to tackle energy ous grounds. The climate policy stringency covers the policy
and environmental issues and is considered the most appropriate way instruments of sectoral policies (market-based and nonmarket-based),
to look for low-carbon energy technologies (Afshan & Yaqoob, 2023). cross-sectoral policies (climate finance, climate governance, GHG
However, the literature provides confusing evidence on the role emission reduction targets, etc.), international policies (international
of financial development (FD) and green investment (GI) regarding cooperation, climate data, and reporting, international public finance)
their environmental attributes. There is a plethora of research that has and market-based and nonmarket-based instruments (OECD, 2022).
found the dichotomous impact of financial development on the qual- Additionally, the level of trade openness (TRD) is another compo-
ity of the environment, for example, positive implications through nent that is believed to be crucial for sustainable economic growth
renewable energy investments and research and development and the environment. With this in mind, the ideal level of imports and
(Akadiri et al., 2022), as well as a negative consequent impact on envi- exports is a significant factor. In 2019, the G-7 countries' total imports
ronmental quality by increasing the public demand for consumer and exports accounted for 35% and 32% of their total trade, respec-
goods and large-ticket items (Kartal et al., 2023; Shen et al., 2021). tively. The United States of America is the nation that has the highest
Similarly, researchers have recently started to dwell on the role of total imports and exports on a worldwide scale among these coun-
green investment concerning the ecological perspective by taking dif- tries. It is essential to have a clear understanding that trade has the
ferent proxies of green investment, for example, R&D spending potential to either positively or badly affect the environmental quality
(Dogan & Pata, 2022), renewable energy R&D investment (Kartal of any nation. These effects change according to the stage of eco-
et al., 2023; Pata et al., 2023; Shen et al., 2021), investment in nomic growth that a country is experiencing.
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 3

Previously, the concept of ecological footprint (EFP) accounting hypothesis, which shows the non-linear connection between income
originated from the quest to find sustainable development indicators and LCF.
that could show the anthropogenic scars the human consumption pat- Economic growth (GDP), or income level, affects ecological sus-
terns put on the face of the earth and how the human demands on tainability through three channels. The scale, the composition, and the
natural resources connect to the Earth's load bearing capability technical effect (Guloglu et al., 2023). At the early stage of economic
(Hoekstra, 2009). So, EFP inculcates all the land used to create wood, growth, economies are going through vast industrialization, more
food, and fiber and is well suited to compressing the complicated con- waste production, pollutant emissions, and the extraction of
sumption sequences into a single heuristic. On the other hand, bioca- resources. At this stage, people are more concerned about increasing
pacity (BC), or the earth's carrying capacity, represents the their income with less focus on what is happening with the environ-
ecosystem's supply side to meet human demands or the maximum ment. So, in the scale effect, LCF decreases due to an increasing eco-
availability of resources. So, Siche et al. (2010) suggest using the LCF logical footprint and damaging biocapacity. After reaching a certain
as the ratio of BC to EFP. So, the LCF differentiates itself by merely income level and threshold point, economic growth is accompanied by
using environmental degradation indicators by including both sides of expanding the service sector and environmental considerations. So
the availability and utilization of natural resources through a unified due to the composition effects, the ecological quality has deterio-
metric. If the value of the LCF index is equal to or more than “1”, it rated. Further, governments consider environmental quality and eco-
presumes a state of ecological sustainability. Ecological sustainability logical sustainability in the technical mode of the economy and invest
or simple sustainability refers to the state where human actions con- more in environmental-related R&D and renewables. At this stage, the
serve the natural function of the earth's ecosystem or, in a broader government has enough financing to invest capital expenditures
spectrum, maintain coherence between the three pillars of sustainabil- related to renewable and environmentally friendly technologies. So
ity (economic, social, and environmental) (Chapin III et al., 1996; due to the technical effects, the economies secure their ecological
Geissdoerfer et al., 2017; Hansmann et al., 2012) and assure the har- sustainability, and LCF improves (Guloglu et al., 2023; Pata
monious relationship among economies, communities (Abid et al., 2023). The macroeconomic indicators tend to accompany eco-
et al., 2024). On the other hand, if the LCF rate is less than “1”, it indi- nomic growth differently and ought to flatten, steepen, or change the
cates insufficient ecological resources to meet human demands and shape of the load capacity curve accordingly. Therefore, scholars are
that environmental deterioration has reached alarming levels dwelling on exploring the properties of the LCC hypothesis to find the
(Caglar & Yavuz, 2023). best policy choices to increase ecological sustainability. Therefore, dif-
The study tested the nonlinear relation between income and LCF ferent economies are showing different results of LCC hypothesis
under the load capacity curve (LCC) theory, which is the mirror image testing, where many studies found the prescribed U-shaped curve
or inverted form of the environmental Kuznets curve (EKC) hypothe- between LCF and income growth (Afshan & Yaqoob, 2023; Dogan &
sis. The LCC theory assumes that at the initial stages of economic Pata, 2022; Guloglu et al., 2023) and others found the contrary find-
development, nations extract more than invest in biocapacity, which ings (Pata et al., 2023; Shahzad et al., 2024).
causes an increase in the EFP and a decrease in the BC to support To analyze the LCC hypothesis, the study has selected G-7 econ-
economic growth activities. However, BC tends to increase after omies, which comprise (Canada, Germany, France, Italy, Japan, the
reaching a certain point in income, while EFP decreases due to envi- United States, and the United Kingdom). There are several underlying
ronmental awareness, technological innovation, green financing, and reasons to prioritize these economies. As per the World Bank's 2022
investments. This relationship forms a U-shaped curve, supposing that report, these countries account for 56% of global gross domestic
income can increase the LCF after reaching a certain point (Guloglu product, making them major contributors to environmental degrada-
et al., 2023). Figure 1 indicates the U-shaped curve of the LCC tion, ecological disturbance, and imbalance. Further, 23% of world-
wide greenhouse gas emissions are emitted by these countries,
equivalent to 7835 million tons of GHG emissions. Besides this, these
countries also share a substantial amount of trade volume (1744 bil-
lion US dollars in 2013), which has unequivocally risen since then
(World Development, 2020). International trade provides numerous
economic prospects, but it is important to acknowledge that it can
also contribute to detrimental environmental circumstances (Bai
et al., 2023). Figure 2 demonstrates that G-7 economies have an unfa-
vorable situation where only Canada stands above the sustainability
limit, and the rest of the six countries fall below the sustainability limit.
It demonstrates that the ecological footprints are greater than the
earth's biocapacity or that resources are being extracted more than
being regenerated, posing detrimental dents on sustainability.
FIGURE 1 Relation of LCF with GDP. Source: Authors own In response to the above-described climate challenges, G-7 econ-
creation. omies have undertaken proactive measures after ratifying the
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4 JAVED ET AL.

F I G U R E 2 Load capacity factor trends

in G-7 countries (gha). Source: Global
Footprint Network, (2022).

F I G U R E 3 Environmentally related government R&D budget, % F I G U R E 5 Development of environment-related technologies, %

of total government R&D. Source: OECD database. of all technologies. Source: OECD database.

renowned “Paris Agreement” in 2015. Efforts are being made to bring

the global temperature down to the preindustrial state of 1.5
C (Bai
et al., 2023). For this, G-7 economies have raised investment in
research and development to bring about green technological
advancements in renewable energy solutions and other areas.
Further, Figure 3 illustrates the share of each country's
environmental-related R&D budget % of total government R&D. The
figure demonstrates that in 2019, the share of the USA's environmen-
tally associated R&D spending % of total government R&D is the low-
est, with a value of 2%, and Canada spent the largest share at 26%. In
addition, the spending proportions of environmentally associated
R&D spending % of total government R&D for France, Germany, Italy,
Japan, and the UK are 9%, 17%, 15%, 20%, and 11%, respectively.
Further, the portion of the renewable energy public RD&D budget, %
of total energy public RD&D for G-7 individual countries is shown in
F I G U R E 4 Renewable energy public RD&D budget, % of total Figure 4. According to the figure, Germany devotes a significant
energy public RD&D. Source: OECD database. amount (21%) of its public energy R&D spending to R&D related to
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 5

green sources of energy, while the USA spends the smallest share, investment is measured by creating the index of the three most com-
equivalent to 9%. In addition, the UK contributes 14%, Italy spends monly used indicators of green investment: environmentally related
20%, and France, Japan, and Canada spend 13%, 11%, and %, government R&D budget, renewable energy public R&D budget, and
respectively. development of environmentally-friendly technologies. Further, the
Figure 5 shows the percentage of development of environmental- study has selected the G-7 economies that demand concrete policy
related technologies in total technologies for individual G-7 nations. instruments due to their pace of economic growth and climate issues.
In 2019, Germany and France had the highest share of Moreover, the study has adopted second-generation econometric
environmental-related technologies in terms of total technologies models to inculcate the problems of cross-sectional dependence in
(17%) and (16%), respectively. On the other hand, the USA, the UK, cross-sectional units. The results provide advocacy in favor of enhanc-
Japan, Italy, and Canada contribute 12%, 15%, 13%, 12%, and 15%, ing green investment and environmental policy stringency to increase
respectively, to their overall technological advancement. To some the LCF and attain certain sustainable development goals. Further, the
extent, these efforts have shown efficacy. However, G-7 economics results have confirmed the validity of the LCC hypothesis in the sam-
still fall short of attaining sustainable agreements and require a signifi- pled nations, which signifies the need to increase the income level to
cant change in environmental policies and regulations as well as green build LCF in these countries.
investment and financing to lower the dependency on fossil fuels and The remaining parts of the research are organized as follows:
protect the carrying capacity of the earth. Similarly, it is crucial to ana- Section 2 provides the relevant literature. Section 3 explains the
lyze the viability of these policy choices to know their marginal impact study's model, variables, data, and empirical approaches. Section 4
on eco-sustainability and develop policy-level suggestions to lower covers the results and their discussion. Finally, Section 5 includes the
the ecological cost of economic growth. So, the study would serve study's concluding remarks and important policy implications.
this important objective by dwelling on whether shifting toward green
investment and increasing the stringency of environmental regulations
serves the objective outlined in the COP26 summit and how these 2 | LI T E RA T U R E RE V I E W
policy choices are assisting the G-7 economies in managing sustain-
ability issues. Much research has examined the reasons for exacerbating environ-
So, the study's main question to answer is “Do green investment, mental degradation; however, few have offered solutions to stop eco-
environmental policy stringency, natural resources, and financial develop- logical corrosion and disturbance. To pursue sustainable goals,
ment affect the index of load capacity factor of G-7 economies?”. The economies strive to embrace environmentally friendly technological
study at hand answers the above question on the bedrock of the LCC and financial innovations for green investment that can assist in
hypothesis. It aims to analyze the extent to which green investment, energy efficiency and conservation, waste management, and halting
environmental policy stringency, financial development, natural the depletion of natural resources. Below is a brief review of the liter-
resources rent, and trade activities contribute to increasing the load ature on the core topic of the study and pertinent gaps.
capacity factor of G-7 countries. For empirical analysis, we utilize
panel data from 1990 to 2019. After evaluating the prior literature on
the topic, we identified several necessary justifications for the novel 2.1 | Green investment, financial development,
objectives of the current study. First, the research inculcates the LCF and ecological sustainability
as a measure of climate change and resilience under the theoretical
pinning of the LCC hypothesis. Most of the previous studies have Literature witnessed the increasing advocacy of green investment
focused on carbon emissions and ecological footprints individually (environmental-related R&D, renewable energy public RD&D, and
(Bai et al., 2023; Jiang et al., 2024; Pata et al., 2023; Shu et al., 2023), environmental-related technologies) to curtail the pace of environmen-
which only consider one aspect (demand side factors) of ecological tal issues. The need for green financing and investments is being
sustainability. The LCF entails supply-side factors (natural resources, highlighted in every forum to mobilize the involved parties, as green
biocapacity), but validating this novel notion requires multiple tests investment is the key to green innovation, clean energy, and
with different sets of economies and parameters. To serve this pur- green growth, ultimately securing Earth's biocapacity. Having the same
pose, the model parameters are tested in the framework of the LCC view, Shen et al. (2021) probed the impact of green investment, energy
hypothesis. Second, the study has considered green investment, consumption, NRR, and FD on China's environmental quality. The
financial development, and environmental policy stringency while con- authors employed various econometric techniques, and the results indi-
trolling natural resources rent, trade openness, and economic growth cate that green investment curtails carbon emissions, whereas FD,
in a framework that was not tested previously. Importantly, there is a NRR, and energy utilization contribute to environmental degradation.
growing interest in evaluating green investment and climate connec- Similarly, Lyeonov et al. (2019) researched the scenario of green invest-
tions; nonetheless, most studies have measured green investment ments linked with economic development, renewable energy utilization,
using a single indicator (Shen et al., 2021). The authors posit that a and carbon emissions in European nations. Their results revealed that
single indicator cannot measure the broad concept of green invest- green investment helps to spur economic growth, and renewable
ment and requires comprehensive quantification. So, green energy investment, more importantly, tends to decrease greenhouse
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6 JAVED ET AL.

gas emissions. Exploring the role of R&D, Dogan and Pata (2022) ana- order to lay the groundwork for sustainable economic growth, gov-
lyzed the influence of research and development, clean energy con- ernments are taking rigorous action to formulate policies and carefully
sumption, ICT, and income on the LCF of G-7 economies. Their implement them. Based on a similar conception, Hassan and Rousse-
outcomes reveal the existence of the LCC hypothesis, where the cho- lière (2022) have analyzed the role of EPS in spurring environmentally
sen indicators positively induce the LCF in these countries. Exploring friendly technological innovation. The data consists of 27 OECD
the role of very important indicators, Afshan and Yaqoob (2023) inves- nations from 1990 to 2015. Applying different econometric tech-
tigated the role of green taxation and green innovation for emerging niques reveals that the greater the policy stringency, the greater the
economies, covering the data from 2000 to 2018. The results of vari- technological innovation. Further, comparing market- and non-
ous econometric techniques reveal the U-shaped relationship between market-based measures, the study advocates non-market-based pol-
ecological sustainability and economic growth. Focusing on renewable icy instruments to stimulate environmental innovations. Similarly,
and nuclear energy R&D investment, Kartal et al. (2023) investigated Chen et al. (2022) explored the role of environmental policy strin-
the LCC hypothesis of Japan by covering the data from 1974 to 2018. gency, technological innovation, non-renewable energy, GDP, and
The research results reveal that renewable energy R&D investment environmental taxes on the level of ecological footprints of OECD
promotes ecological sustainability while economic growth and financial and non-OECD countries. The results unveil the positive association
development degrade environmental quality. Considering the financial between environmental taxes, environmental policy, and eco-
perspective, Akadiri et al. (2022) studied the impact of financial globali- innovation, proving that these indicators improve environmental qual-
zation on the LCF of India, and the findings revealed positive implica- ity for both of the subsamples of the study. Similarly, Li et al., (2022)
tions of it. According to Bai et al. (2023), investment in green found an optimistic association between EPS and environmental
technological innovation is a suitable policy choice to curb health in OECD countries.
consumption-based air pollution in G-7 economies. Discussing the role Contrary to the above discussion, some studies found a positive
of environmentally related technologies in economic development and association between policy stringency and environmental degradation.
renewable energy utilization, Sun et al. (2022) posit that investment in Demiral et al. (2021) investigated the role of policy stringency for
environmentally related technologies improves the environmental qual- OECD countries by dividing the sample into high- and middle-income
ity of OECD countries. However, some studies have not proven the countries. The study also inculcated international investment, trade
existence of the LCC hypothesis and have shown that income growth openness, industrialization, and income per capita as the control vari-
is not the cure for low LCF. For instance, Pata et al. (2023) investigated ables. The results reveal that increasing the level of policy stringency
the matter by including renewable energy R&D and nuclear energy doesn't control environmental issues but rather increases them in
R&D in the context of Germany. By applying the various econometric both of the sub-samples of high- and middle-income countries. Fur-
techniques, the authors report the validity of EKC and the invalidity of ther, industrialization and trade openness also increase carbon emis-
the LCC hypothesis. sions; however, energy productivity and foreign investment
The above discussion indicates that there is no uniform definition decrease them.
of green investment, and authors have taken different proxies for Environmental taxes are considered the most important environ-
it. Further, there are only a few studies on this nexus, and the findings mental policy instrument when the government imposes taxes on
are also inconclusive. Further, the role of FD is well-versed in environ- unfriendly environmental activities (Bosquet, 2000; Safi et al., 2021).
mental deprivation but quite scant when considering the ecological Many studies have investigated the consequences of environmental
perspective, like LCF. So, the study hypothesized that green invest- taxes on sustainability where authors have reported the positive
ment would exert a beneficial influence on LCF, while the role of implications (Abbas et al., 2023; Niu et al., 2022; Usman et al., 2024;
financial development depends on the phase of economic growth Wang et al., 2023), while others also found adverse results (Dogan
countries are going through. Most importantly, environmental regula- et al., 2023). However, on one hand, the generated tax collection can
tions and green financial development can also control the negative be used to develop environmentally friendly activities and, on the
infliction of financial development. Considering the LCC rationale, this other hand, to reduce the pre-existing taxes for economic welfare.
study has hypothesized that. This scheme of environmental tax reform also called the double divi-
dend hypothesis, is popularized in environmental economics.
Hypothesis 1. Green investment and financial develop- Researchers are delving into analyzing the double dividend
ment positively impact the load capacity of G-7 (DD) hypothesis of environmental taxes to investigate whether “envi-
economies. ronmental bad” and “economic goods” have some coherence or not.
Employing computable general equilibrium, Freire-González (2018)
reported that most simulations have achieved environmental divi-
2.2 | Environmental policy stringency and dends, while economic dividends are controversial and yet to be
ecological sustainability established. Similarly, Wesseh Jr and Lin (2019) concluded that DD
might be achieved by having a uniform tax policy; however, it is unsui-
Recent literature has begun to acknowledge the importance of strict table for transitioning an economy with partial tax policies. Con-
environmental policies in addressing the growing climate crisis. In versely, there is a strong disagreement in the literature regarding the
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JAVED ET AL. 7

necessity of stringent environmental regulations to tackle the growing openness is backed by industrialization, and low technical efficiency
ecological deficit. Besides that, the literature provides scant evidence leaves higher ecological footprints and a decrease in biocapacity.
on the EPS and LCF perspectives, particularly for G-7 countries. So, However, at a higher stage of economic growth, trade is backed by
considering the LCC rationale, we posit that the EPS would help to energy efficiency technical solutions and environmental consider-
increase the LCF of G-7 countries by restricting environmentally dam- ations, which help to reduce the EFP and increase LCF. However, with
aging activities and supporting sustainable initiatives. So, the second environmental regulations and environmental considerations at the
hypothesis the study postulates is: government level, the negative externalities can be controlled while
pacing economic growth. Therefore, we postulate that.
Hypothesis 2. There is a strong positive association
between the stringent environmental policies and the Hypothesis 3. Trade openness and natural resources
load capacity factor of G-7 economies. rent posit a strong negative impact on the load capacity
factor of G-7 economies.

2.3 | Trade openness, natural resources rent, and

ecological sustainability 2.4 | Research gap

An extensive study has been undertaken on the interrelationship The discussion in the above section indicates that green finance, envi-
between trade, natural resources, and the environment. Nevertheless, ronmental policy stringency, financial development, trade openness,
the available information presents a varied and inconclusive picture. and natural resources play a significant role in shaping ecological sus-
One strand believes that the exhaustion of natural resources harms tainability. These aspects have a pivotal role in describing a nation's
ecological quality and establishes a negative impact of natural biodiversity and ecological footprints and have a crucial role on the
resources rent on LCF. On the same point, Caglar and Yavuz (2023) policy front. However, despite this evidence, the world policy dis-
state that natural resources rent contribute to environmental degrada- course is still in a pursuit of viable framework, especially by inculcating
tion by reducing the LCF; however, environmental protection expen- these dimensions. Ecological sustainability is subject to transformation
diture remains insignificant. Natural resource rent hampered China's under the extreme situation of these aspects; therefore, ecological
economic growth, supporting the resource curse hypothesis (Sun, Li, sustainability must be analyzed through these lenses. Particularly, the
et al., 2023). With similar findings, Pata and Isik (2021) figured out literature shows mixed findings for green investment where quantifi-
that the energy intensity and NRR decrease the environmental quality cation of green finance is still evolving; financial development shows a
of China by reducing the LCF. Further, Ni et al. (2022) investigated dichotomous impact, and environmental policy still needs to be
the matter for highly resource-utilizing nations and found the negative explored. Similar is the case with trade openness and natural
impact of NRR and GDP on LCF. However, good governance and digi- resources rent. On the other hand, the inclusion of LCF is quite novel
talization improve it. On the other hand, NRR may not inflict any sig- in sustainability literature, and the LCC hypothesis requires rigorous
nificant effect on LCF, as found by Akadiri et al. (2022) in the context testing for its establishment. So, looking at the current scenario, there
of India. Contrary to this, Guloglu et al. (2023) analyzed the LCF of is a yawning gap in recognizing the connectedness of these dimen-
OECD countries, and the results of quantile panel data reveal that sions with LCF. The study addresses these gaps by prescribing a novel
NRR improves the LCF of OECD countries. Similarly, according to framework that offers novelty in many aspects and policy-level sug-
Sun, Usman, et al. (2023), NRR improve the ecological sustainability of gestions to attain eco-sustainability and sustainable development.
the Asian-Pacific Economic Cooperation (APEC). Similarly, the scant
literature on trade openness as a determinant of LCF also provides
dichotomous results. Caglar and Yavuz (2023) found that trade open- 3 | METHODOLOGY
ness widened the door for eco-friendly technologies and had a favor-
able impact on the LCF of European Countries. Contrary to this, Bai 3.1 | Variables and data
et al. (2023) found that green trade is more futile and damaging for
the environment, so it is a highly ineffective policy choice to abate This research aims to explore the role of green investment, environ-
consumption-based emissions in the seven growing economies. mental policy stringency, financial development, natural resources
So, the literature provides inconclusive results on the impact of rent, and trade openness on the LCF in the load capacity curve
TRD and NRR. In the context of the LCC hypothesis, we would state hypothesis framework. In order to achieve the objective of the study,
that natural resources rent may negatively or positively impact the annual panel time series data is utilized for the G-7 countries over the
LCF. Careful extraction of natural resources with technological inno- period 1990–2019. The data availability on these indicators fully dic-
vation may positively impact LCF. Further, the level of energy imports tates the research timeframe. We delve into these developed indus-
also affects the impact of NRR on LCF. Similarly, the effect of TRD trial economies because they play a pivotal role in environmental and
varies depending on which stage of economic development a country industrial policy, which is essential for the long-term viability of the
is going through. At the early stage of economic growth, trade environment (Bashir et al., 2024). This economic bloc of seven
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
8 JAVED ET AL.

TABLE 1 Description of variables.

Variables Symbol Unit of measurement Sources Literature

Load capacity factor LCF Biocapacity is divided by the ecological footprint (in global GFN Javed et al. (2024)
hectares per person)
Green Investment GI i. Environmentally related governmental R&D budget, OECD Musah et al. (2023), Sun et al. (2022),
Index (PCA) % total governmental R&D Pata et al. (2023)
ii. Renewable energy RD&D budget, % total energy RD&D
iii. Development of environmentally friendly technologies,
% all technologies
Financial FD Financial Development Index IMF Shen et al. (2021)
development
Environmental policy EP Environmental policy stringency index OECD Li et al., (2022)
Economic growth GDP Per capita (Constant 2010 US$) WDI Kartal et al. (2023)
Natural resources NRR Natural resources rents % of GDP WDI Caglar and Yavuz (2023)
Trade openness TRD Sum of exports + imports/GDP WDI Adebayo et al., 2023

nations, which includes the United States of America, the database. Table 1 presents the study variables along with their sym-
United Kingdom, Japan, Italy, Canada, Germany, and France, collec- bols, units of measurement, and data sources.
tively has a significant amount of influence over the economic land-
scape of the world (Onwe et al., 2023). Further, the G-7 nations also
play a leading role in international policymaking, particularly when it 3.2 | Models specification
comes to developing policies that promote long-term environmental
sustainability. In terms of policy formation and implementation, their Environmental contamination unquestionably has undesirable conse-
actions and initiatives frequently serve as worldwide benchmarks, cre- quences. To deal with this negative externality and reduce environ-
ating standards and best practices and acting as a torch bearer for the mental degradation, governments must establish strict environmental
rest of the economies to follow in terms of the development and exe- rules and regulations accompanied by green investment and the
cution of policy. As a result, this body of research has the potential to establishment of green markets and institutions while controlling for
make a significant contribution to the ongoing conversation that is other important indicators. To analyze the viability of the prescribed
taking place all over the world regarding environmental problems and nexus and theoretical concepts discussed earlier, the following mode
possible solutions. is designed:
The dependent variable of the study is the load capacity factor, a


more comprehensive indicator of environmental quality, which is LCF ¼ f GI, EP, FD, NRR, GDP, GDP2 , TRD ð1Þ
expressed per capita and measured by biocapacity/ecological foot-
print and it is gathered from the global footprint network. The main
independent variable of the study is green investment (GI). Following The regression form of the above equation can be explained
Musah et al. (2023), who used an index to measure green investment, below:
we also applied the principal component analysis (PCA) method to
create a green investment index for the analysis, which distinguishes LCF it ¼ β0 þ β1 GIit þ β2 EPit þ β3 FDit þ β4 NRRit þ β5 GDPit ð2Þ
our research from the previous studies. The green investment index is þ β6 GDP2it þ β7 TRDit þ εit
constructed using the PCS score based on three indicators: the envi-
ronmentally related government R&D budget, the renewable energy
public RD&D budget, and the development of environmentally related where β0 indicates the slope, β1 to β7 are the coefficients of indepen-
technologies. The data for these indicators is retrieved from the dent variables, while εit denote the error terms. Furthermore, LCF
OECD database. Further, the environmental policy stringency index refers to the load capacity factor, EP represents environmental policy
(EP) is used as a proxy of the effectiveness of the environmental law; stringency, FD stands for financial development, NRR represents the
financial development has been defined as the financial development natural resources rent, and GDP and TRD explain economic growth
index (FD); natural resources rent (NRR) is measured as total natural and trade openness, respectively. The subscript “t” denotes the study
resources rent (% of GDP); economic growth (GDP) is defined as per period (1990–2019), while “i” indicates the cross-sections, that is,
capita GDP in constant 2015 US$; and trade openness (TRD) is deter- (G-7) nations.
mined as the sum of exports + imports/GDP. The data on EP was col- Based on the literature review results, we anticipate a positive
lected from the OECD, the financial development index was taken association between green investment and the level of LCF in G-7
from the IMF, and GDP and TRD were retrieved from the WDI nations. The rationale behind this positive relationship is that huge
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 9

R&D investments in clean energy sources, advancements in environ- are () and (+). Similarly, trade openness, which initially degrades the
mental technology, and other forms of R&D all serve to augment the environment but, after gaining certain economic growth, energy effi-
conventional setup in both the industrial and domestic spheres (Shu ciency, and technological innovation, might exert positive effects on
et al., 2023). So, it helps to increase the LCF, and the relation LCF. At the initial stage of economic expansion, industrialization
expressed as β1 ¼ LCF
GIi,t > 0, with the positive expected sign. Similarly,
it
serves as a foundation for trade openness, while low technical effi-
stringent environmental policies can potentially increase the price of ciency results in increased ecological impact and a reduction in bi
climate-destructive activities, which in turn alters the behavior of con- capacity (Wang et al., 2024). Nevertheless, at a later period of eco-
sumers and businesses to switch to products and procedures that are nomic expansion, trade is supported by technical solutions for energy
less harmful to the environment and enhance the biocapacity of the efficiency and environmental considerations, which facilitate the
ecosystem. Hence, environmental policy stringency positively affects reduction of the EFP and the increase in LCF. Hence, trade openness
the LCF, expressed as: β2 ¼ LCF it
EPi,t > 0, and the predicted sign for this could affect LCF positively or negatively, expressed as: β7 ¼ TRD
LCFit
i,t
>0
variable is positive (+). or β7 ¼ TRD
LCFit
i,t
< 0 and the anticipated sign for this variable is positive (+)
Further, financial sector development is another factor that can or negative (). Figure 6 provides a visual representation of the theo-
influence the quality of the ecosystem. FD helps to increase the pene- retical underpinnings for the connections that are discussed in this
tration of credit which in turn increases the demand for consumer research.
goods and large ticket items (air conditioners, huge mansions, vehicles,
etc.), which in turn reduces the LCF. However, FD also has the poten-
tial to play an essential part in improving the environment by making 3.3 | Estimation strategy
it possible for environmental initiatives to be carried out in both the
public and private sectors at a lower cost (Tamazian & Rao, 2010). It is crucial to initially analyze the nature and properties of the data
Hence, financial sector development could affect positively or nega- when working with panel data. The outcomes of these diagnostic pro-
tively the LCF, expressed as: β3 ¼ LCF
FDi,t > 0 or β3 ¼ FDi,t < 0 and the
it LCF it
cedures are then applied to selecting relevant and feasible economet-
anticipated sign for this variable is positive (+) or negative (). ric experiments. This study incorporates cutting-edge econometric
Theoretically, the rapid economic growth from abundant natural techniques to examine how various explanatory factors influence the
resources can impact environmental health (Tauseef Hassan dependent variable (LCF). As a preliminary stage in the estimating pro-
et al., 2021). The availability of abundant natural resources is essential cedure, the Pesaran and Yamagata (2008) slope coefficient heteroge-
for sustainable economic development. However, the resource curse neity (SCH) test is applied to the estimation parameters. The second
theory suggests that a heavy reliance on natural resources harms our step involves verifying the cross-sectional dependency (CSD) with the
ecosystem's health (Balsalobre-Lorente et al., 2021). Given these use of the Breusch-Pegan LM (BP-LM), Pesaran-scaled LM (PS-LM),
facts, we can predict that the NRR and LCF nexus is negative (), or and Pesaran-CSD (P-CSD) tests, respectively. In the third stage, the
that β4 ¼ NRR
LCFit
i,t
< 0. 2nd-generation stationarity tests, such as the CIPS and CADF, are car-
As described earlier, LCC posits the U-shaped nonlinear associa- ried out to assess the stationarity qualities of the underlying data. In
tion between GDP and LCF. Based on the LCC framework, the the fourth step, we used the test of cointegration suggested by Wes-
expected relationship of GDP and GDP2 with LCF is negative and pos- terlund (2007) to verify the long-term cointegration connection
itive β5 ¼ GDP
LCFit
i,t
< 0, β6 ¼ GDP
LCFit
2 > 0, respectively and the anticipated signs between the variables. Fifth, using methods like CS-ARDL, FMOLS,
i,t
and DOLS, we examine the persisting relationships between our
research variables. Finally, the panel Granger causality test of Dumi-
trescu and Hurlin (2012) is applied to evaluate the causation direction
between the variables of interest.

3.3.1 | Slope heterogeneity test

Before moving on to formal estimations, it is necessary to check the

slope coefficient heterogeneity (SCH) issue. It would be inappropriate
to treat each cross-section as a homogeneous variable because the
countries under investigation may display non-linear and varied char-
acteristics regarding population growth, income, the development of
technological innovations, and environmental policies (Ahmad &
Wu, 2022). We may get inconsistent outcomes if we do not account
for the SCH issue. The present research used the Pesaran and Yama-
FIGURE 6 Theoretically expected environmental effects of the gata (2008) test to evaluate the slope coefficients' nature and deter-
variables. mine whether heterogeneity exists. This test is considered a modified
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
10 JAVED ET AL.

version of the one described by Swamy (1970). The equations associ- sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
N1 X
X N
2T
ated with SCH are demonstrated as follows: PS  CSD ¼ T ij ð7Þ
NðN  1Þ i¼1 j¼iþ1
 
~ 1
Δsch ¼ ðNÞ1=2 ð2K Þð1=2Þ ~s  K ð3Þ
N
3.3.3 | Panel unit root test
   
~ 2K ðT  K  1Þ 1=2 1 Researchers widely acknowledge that most macroeconomic variables
ΔAdj  sch ¼ ðNÞ1=2 ~s  2K ð4Þ
T þ1 N
are non-stationary and produce inaccurate regression estimates.
Therefore, after establishing the CSD and the existence of heteroge-
~
In the equations presented above, Δsch ~
and ΔAdj  sch stands for neous slopes, it is crucial to check for the presence of a unit root. It is
SCH and adjusted SCH, respectively. This test contrasts the null important to consider the occurrence of CSD and slope heterogeneity
hypothesis of homogeneity of slope coefficients with the alternative issues while choosing appropriate panel unit root testing. The conven-
hypothesis of heterogeneity of slope coefficients. tional first-generation unit root tests provide inconsistent outcomes
in the presence of CSD and parameter slope heterogeneity. In panel
data analysis, the misleading outcomes of the first-generation statio-
3.3.2 | Cross-sectional dependency test narity tests are due to their assumption of slope homogeneity and
cross-section independence. The current research uses Pesaran's
Next, the cross-sectional dependency (CSD) between the cross- (2007) CIPS and CADF unit root tests to address these issues. These
sections is evaluated before diving into an empirical investigation of 2nd-generation unit root tests are more resilient than older
the relationships between the components. The conventional approaches due to their ability to consider CSD and SCH, making
estimation techniques assume that error terms are uniformly distrib- them ideal for use with heterogeneous panels. The mathematical
uted across cross-sections (Baltagi and Kao, 2001). However, subse- framework of the CADF is expressed as follows:
quent empirical literature reveals that CSD often exists in the panel
data (Sarafidis and Wansbeek, 2012). For instance, in this era of X
k X
k
ΔV i,t ¼ δi,t þ δi W i,t1 þ δi V t1 þ δil ΔV t1 þ δil ΔV i,t1 þ εi,t ð8Þ
globalization, countries and regions are well connected through l¼0 l¼0
trade and border agreements. Therefore, a shift in economic policy
in one economy or region can have spillover effects across the globe. where V t1 and ΔV t1 denotes the cross-section average. CIPS is
It is highly instructive to check the CSD before selecting an appropri- determined by taking the average of CADF as expressed in
ate stationarity test, cointegration test, and econometric model. Equation (9).
Because the estimator's inefficiency and erroneous results can stem
from failing to account for CSD and using inappropriate econometric X
n
d ¼ N1
CIPS CADFi ð9Þ
tools, leading to inaccurate policy implications and proposals i¼0

(Westerlund, 2007). The present research employed the BP-LM

(Breusch & Pagan, 1980) and PS-LM and PS-CSD (Pesaran, 2021) 3.3.4 | Panel cointegration test
tests to tackle this issue. The mathematical formula for the (BP-LM)
CSD test is as follows: Next, examining the long-term cointegration among the LCF and the
independent variables in the target model is important before estimat-
N1 X
X N
X NðN  1Þ
2
ing the regression. This research looked for evidence of a long-run
BP  LM ¼ ρ2ik !
T ik b ð5Þ
i¼1 K¼iþ1
2 connection between the model variables using a cointegration test
developed by Westerlund (2007). When it comes to the CSD and
However, for larger N, the BP-LM test could produce inaccurate SCH, first-generation cointegration tests fall short and do not address
findings. In this connection, Pesaran (2015) proposed the PS-LM test the CSD and SCH issues. We employ the Westerlund cointegration
statistic for evaluating the CSD for bigger N and T situations and pro- test to avoid the abovementioned issues and generate objective
vided the following test statistics: results. With the assumption of no cointegration as the null hypothe-
sis, this method makes predictions using the four different test statis-
sffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
N

N1 X
X  tics (Pa, Pt, Ga, and Gt).
1
PS  LM ¼ ρ2ik ! Nð0, 1Þ
T ik b ð6Þ
NðN  1Þ i¼1 K¼iþ1
1X N
αi
Gt ¼ ð10Þ
N i¼1 SEðαi Þ

However, Pesaran (2015), who argued that the PS-LM test statis-
tic should not be used when N > T, proposed the subsequent PS-CSD 1X N
Tαi
Ga ¼ ð11Þ
N i¼1 αi ð1Þ
test statistic:
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 11

α  
Pt ¼ ð12Þ W t1 ¼ LCFt1 , V t1
SEðαÞ

W t1 represents the average of LCF t1 (dependent variable) and

Pt ¼ Tα ð13Þ
V t1 (all the explanatory variables) which removes the problem of
CSD. Furthermore, pu , pv , and pw represents the lag values. In the
The above equations (10)–(13) denote the two-group mean sta- CS-ARDL estimation approach, the estimates of the short-run
tistics and two-panel statistics, respectively. The group mean statistics estimates are used to compute the long-term estimates. Below are
Ga and Gt evaluate the long-term connection with one or more than the estimates of the long-run parameters and the mean group
one component. Meanwhile, Pa and Pt panel statistics estimate the (MG) estimator:
cointegration between the cross-sections.
P
Pv
b
δIi
b
θCDARDL:i ¼ I¼0
ð16Þ
1¼Σ¼0
3.3.5 | Estimation approaches

After establishing the existence of CSD and SCH, conventional esti- The MG estimator can be written as follows:
mation approaches such as FMOLS and DOLS are unsuitable for
estimating the long-run dynamics among the variables. These tech- 1 X
N
b
θMG ¼ b
θMG ¼ b
δi ð17Þ
niques may lead to inaccurate or biased estimates if the data has N i¼1
issues with CSD and SCH (Sheraz et al., 2022; Ali et al., 2020). There-
fore, this study utilizes the cross-sectionally augmented autoregres- While the parameters of the short-run dynamics are expressed as
sive distributed lags (CS-ARDL) model developed by Chudik and follows:
Pesaran (2015) to avoid inaccurate estimates and obtain the appropri-
ate long-run dynamics. In contrast to the traditional approaches, the X
pu1
ΔLCFi,t ¼ θi ½LCFi,t1  θi V i,t1   αi,t Δi LCFi,t1 ð18Þ
CS-ARDL model addresses the issues of CSD and SCH by using a i¼o

dynamic common correlated estimator (Çoban and Topcu 2013). In X

pv X
pw
þ δi,t Δi V i,t þ γ i wt1 þ εi,t
addition, CS-ARDL also handles endogeneity, non-stationary, dynamic i¼0 i¼0
panel bias, omitted variable bias, multicollinearity, endogeneity, and
heteroskedasticity issues. Existing empirical literature (Işık et al., 2024;
Javed et al., 2024; Ouni & Ben Abdallah, 2024; Raza et al., 2024; where
Yadav & Mahalik, 2024) also supports the idea that the CS-ARDL
model's capabilities make it a dependable and resilient choice for ana- Δi ¼ t  ðt  1Þ ð19Þ
lyzing complicated datasets. In addition, the CS-ARDL model is well-
!
known for its capacity to deliver reliable impact parameters, enabling X
pu
bτi ¼  1  αi,t
b ð20Þ
it to efficiently address the numerous issues common in panel data i¼o

analysis (Chudik & Pesaran, 2015). The initial formulation of the model
is depicted below: P
Pv
b
δi,t
θi ¼ i¼o ð21Þ
X
pu X
pv bτi
LCFi,t ¼ αi,t LCFi,t1 þ δi,t V i,t þ εit ð14Þ
i¼o i¼0
1 X
N
b
θMG ¼ b
δi ð22Þ
N
where LCF serves as the explained variable, while V provides all the i¼1

explanatory variables (GI, EP, FD, NRR, GDP, GDP2, and TRD), and
Equation (14) shows the basic ARDL estimates. However, in the exis- The convergence rate to long-run stability defines the error cor-
tence of CSD, these estimates are deemed uncertain. Therefore, we rection term (ECM). Consistent error-correcting behavior is demon-
transform Equation (14) into Equation (15) by including the cross- strated by the predicted coefficient value of ECM being substantially
section average of all the independent variables. The impact of CSD negative (from 1 to 0). In the face of an economic shock, a high nega-
can be reduced by taking the cross-sectional average (Chudik & tive and significant value of ECM indicates a quicker adjustment
Pesaran, 2015). toward reaching steady-state equilibrium.
In addition, two additional approaches, namely the fully modified
X
pu X
pv X
pw
ordinary least squares (FMOLS) developed by Pedroni (2001) and
LCFi,t ¼ αi,t LCFi,t1 þ δi,t V i,t þ γ i W t1 þ εi,t ð15Þ
i¼o i¼0 i¼0 dynamic ordinary least squares (DOLS) proposed by Mark and Sul.,
(2003), are added to the estimation procedures to ensure the robust-
where ness of CS-ARDL outcomes. FMOLS and DOLS are commonly
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
12 JAVED ET AL.

referred to as “semi-parametric approaches,” and these methods not Further, it has come to our attention that the GDP has the highest
only produce accurate findings even in the presence of CSD (Bai mean value, followed by TRD. In addition, neither the skewness nor
et al., 2023; Okwanya and Abah, 2018) but also eliminate the prob- the Kurtosis factors match their expected values of 1 and 3, respec-
lems with serial correlation, endogeneity, and heterogeneity (Kalmaz tively, indicating that the data do not follow a normal distribution.
and Kirikkaleli, 2019). These approaches also address the issue of nor- In the first step of estimation, the study investigated the slope
mality and provide accurate estimates even in cases where the sample coefficient heterogeneity (SCH), and the results are presented in
size is quite small. However, to meet these methods' requirements, Table 3. However, it is important to remember that the researchers
the cross-sections must not exceed the considered period (Bhujabal would experience incorrect outcomes, resulting in misleading debate
et al., 2021). and findings, if the concept of heterogeneity is not investigated. We
tested the SCH by using a modified version of Swamy (1970), and this
test was further refined and analyzed by Pesaran and Yamagata
3.3.6 | Panel causality test (2008). In this sense, the alternative hypothesis suggests variability in
the slope coefficients, while the null hypothesis (H0) presupposes
In the last step of empirical investigation, we conduct a causality homogeneity. The findings in Table 3 support the claim that slope
test to determine the direction of causality between the research coefficients are not identical, as the delta Tilda and adjusted delta
factors. In order to provide effective policy suggestions, verifying Tilda are statistically significant at 1%. These results suggest that the
causality is essential. This is because it illustrates a unidirectional, slopes of the research variables are not uniform.
bidirectional, and no-directional relationship between the variables. In the next step, we empirically evaluated the CSD in the data. In
Since the estimation, methods for long-run analysis employed in this this era of globalization, countries and economies are interconnected
study do not provide this information. Therefore, we utilized the via trade and financial ties. The underlying nations have a close social,
Dumitrescu and Hurlin (2012) causality test to establish the direction financial, and economic relationship. Any shock in one country can
of causation among the variables. This approach is superior to the spread to other countries through the spillover effect. As a result, it is
conventional causality approach of Granger (1969). The mathematical necessary to investigate the CSD. If the issue of CSD is disregarded, it
formulation of this approach is documented as follows: may cause bias and inconsistency in estimations of stationarity and
long-run coefficients. The outcomes of the CSD tests for the research
X
p
ðkÞ
X
p
ðkÞ variables, that is, (GI, EP, FD, NRR, GDP, TR, and LCF) are reported in
Zi,t ¼ σ i þ αi Zi,tk þ ψ i T i,tk þ εi,t ð23Þ
k¼1 k¼1 Table 4. Contrary to null hypothesis, which proposes no association
between units of observational cross-sectional analysis, alternative
ðkÞ
where σ i represents the intercept, k denotes the order of lag. αi and hypothesis challenges this. The findings indicated that all the series
ðkÞ
ψi are the autoregressive coefficients. are statistically significant at 1%, which provides strong evidence for
rejecting H0 (absence of CSD) and supporting alternative hypothesis
(CSD exists).
4 | RESULTS AND DISCUSSIONS After observing the CSD and SCH in the panel data, we have suf-
ficient evidence to move to step 3, primarily concerned with the data
4.1 | Results

In order to comprehend the nature of the data set, we start by analyz- TABLE 3 Slope heterogeneity test.
ing the descriptive statistics associated with each variable. These sta-
SCH test Statistics
tistics describe the most important characteristics of the data set.
ΔSCH 3.896***
Table 2 presents the descriptive characteristics of all the factors under
ΔASH 4.549***
consideration. The mean value for the LCF and NRR variables is nega-
tive, while the mean value for the other variables remains positive. Note: *** indicates a 1% significance level.

TABLE 2 Descriptive statistics.

LCF GI EP FD NRR GDP TRD
Mean 1.026 7.62E-09 0.735 0.747 1.606 10.514 3.801
Median 1.189 0.115 0.853 0.760 2.003 10.471 3.921
Maximum 0.864 2.822 1.552 0.960 1.716 11.013 4.483
Minimum 2.113 2.315 0.693 0.350 4.382 10.222 2.761
Std. Dev. 0.813 1.274 0.508 0.135 1.636 0.182 0.434
Skewness 0.962 0.025 0.533 0.767 0.202 0.687 0.667
Kurtosis 2.151 1.826 2.332 1.166 1.833 2.752 2.460
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JAVED ET AL. 13

TABLE 4 CSD results.

Variables BP-LM Prob. PS-LM Prob. Pesaran CSD Prob.
LCF 112.517*** 0.000 14.121*** 0.000 6.043*** 0.000
GI 66.358*** 0.000 6.999*** 0.000 4.378*** 0.000
EP 158.491*** 0.000 21.215*** 0.000 6.794*** 0.000
FD 139.347*** 0.000 18.261*** 0.000 8.069*** 0.000
NRR 128.390*** 0.000 16.571*** 0.000 9.395*** 0.000
GDP 170.632*** 0.000 23.089*** 0.000 4.251*** 0.000
TRD 175.087*** 0.000 23.776*** 0.000 9.986*** 0.000

Note: *** Indicates a 1% significance level.

TABLE 5 Unit root analysis outcomes. between the study variables, and for which the results are covered in
Table 6. Before assessing the variables' long-term dynamics, looking
CIPS CADF
Variables at their long-term cointegration is crucial. The null hypothesis of no
I(0) I(1) I(0) I(I) cointegrating relationship is tested against the alternative of cointe-
LCF 0.938 5.723*** 0.791 4.621*** gration. The outcomes reported in Table 6 reject the H0 of no
GI 2.864*** 5.632*** 2.646*** 4.592*** cointegration. This implies that variables in the study have a long-term
EP 3.163*** 5.789*** 2.899*** 4.302*** cointegration. It suggests that GI, EP, FD, NRR, GDP, TRD, and LCF
FD 1.971 5.500*** 1.733 3.881** work together in the long-run. Therefore, estimating the long-term
NRR 1.931 5.634*** 1.325 3.865*** impact of GI, EP, FD, NRR, GDP, and TRD on LCF is important.

GDP 1.973 4.208*** 2.017 3.496*** Following the establishment of the long-run association, the long-
and short-term dynamics of GI, EP, FD, NRR, GDP, GDP2, and TRD on
GDP2 1.949 4.191*** 2.001 3.488***
LCF are thoroughly investigated. For this purpose, this study utilized
TRD 2.170 3.184*** 3.001 3.466***
the CS-ARDL method, and the obtained findings are reported in
Note: ***, ** & * show significance level at 1%, 5%, & 10%. Table 7. The estimated results of the CS-ARDL model suggest that
the coefficient associated with green investment is significant and

TABLE 6 Findings from cointegration. positive at a 10% significance level, indicating that GI has an encour-
aging impact on the LCF. To be more precise, a (0.015%) rise in the
Statistics Value Z-value Prob.
level of LCF is attributed to a 1% escalation in green investment in
Gt 3.229* 1.083 0.060 the long-term. This outcome illustrates that green investment plays a
Ga 7.541*** 2.834 0.002 constructive role in the ecological sustainability of G-7 countries dur-
Pt 13.176*** 5.907 0.000 ing the examined period.
Pa 11.696*** 0.477 0.040 Like green investment, the estimated outcomes indicate that
environmental policy stringency in G-7 countries is positive and signif-
Note: ***, ** & * show significance level at 1%, 5%, & 10%.
icantly linked with the level of LCF. We discovered that a 1% upsurge
in EP causes LCF to rise by (0.023%) in the long-run. This concludes
stationarity behavior. It will eliminate the possibility for any erroneous that implementing environmental policy in G-7 countries improves
regression estimates to be produced. In the presence of CSD and environmental health. Further, the long-run estimates demonstrate
SCH, 2nd generation stationarity approaches are recommended that financial development exerts a negative significant influence on
because they produce more accurate estimates. Table 5 displays the the LCF. In particular, the obtained results reveal that a 1% rise in FD
results of an analysis performed to determine the stationarity attri- causes a reduction in the level of LCF by (0.042%). Thus, the financial
butes of the data using the CIPS and CADF tests proposed by Pesaran sector's development destroys ecological sustainability in examined
(2007). The aforementioned tests have received substantially more countries. Moreover, the results explain that the estimated coefficient
attention in recent literature when compared to conventional of natural resources rent is negative and significant at a 5% signifi-
methods for examining data stationarity properties. The results of cance level. This implies that NRR harms the environmental quality in
CIPS and CADF suggest that the underlying research factors are G-7 nations. More precisely, the outcomes demonstrate that a 1%
stationary at I(0) and I(1). Due to the evidence of variables mixed inte- increase in NRR tends to decline the level of LCF by (0.455%). These
gration provided by the unit root tests, a cointegration approach must results imply that environmental quality worsens when countries gen-
be performed to determine if the series exhibits a long-term erate more income through natural resource depletion.
cointegration. Similarly, the long-run estimates of the CS-ARDL model revealed
In addition, the present study employed the cointegration method a significant negative association between GDP and the LCF. This
proposed by Westerlund (2007) to look at the long-term cointegration infers that higher economic growth hurts ecological sustainability. The
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
14 JAVED ET AL.

TABLE 7 CS-ARDL results.

Long-run estimates Short-run estimates

Coef. Std. E. Z P>Z Coef. Std. E. Z P>Z

GI .015* .008 1.70 .090 .010* .005 1.82 .069
EP .023* .013 1.81 .070 .022* .012 1.72 .085
FD .042*** .105 .40 .003 .022** .085 0.26 .054
NRR .455** .011 2.13 .033 .019** .084 2.20 .028
GDP 18.454** 8.044 2.29 .022 14.247** 6.719 2.12 .034
GDP2 .866** .372 2.32 .020 .667** .310 2.15 .031
TRD .044*** .074 .60 .005 .045*** .063 .71 .000
ECM – – – .861*** .084 .000

Note: ***, ** & * denote significance level at 1%, 5%, &10%.

TABLE 8 Robustness check.

FMOLS DOLS
Variables
Coeff. Std. err. Prob. Coeff. Std. err. Prob.
GI .007* .004 .070 .009* .014 .065
EP .010*** .007 .005 .016** .036 .046
FD .013* .032 .088 .140** .127 .069
NRR .030*** .003 .000 .042** .018 .021
GDP 18.703*** .3.846 .000 10.900*** 6.029 .007
GDP2 .876**** .183 .000 .497*** .283 .080
TRD .049** .021 .026 .263*** .063 .000

Note: ***, ** & * denote significance level at 1%, 5%, &10%.

results illustrate that a rise of 1% in the GDP appears to lower sustainability. These findings provide evidence that the LCC theory
the level of LCF by (18.454%) at the significance level of 5%. Contrary exists in underlying countries. Besides, the negative coefficient of
to this, the results demonstrate a substantial beneficial impact of TRD demonstrates that trade activities in G-7 countries harm environ-
GDP2 on LCF. The outcomes reveal that a 1% rise in GDP2 improves mental quality by lowering the LCF. In addition, the estimated coeffi-
the LCF by (0.866%). The significant negative coefficient of GDP and cient value of ECT is negative and significant. The ECT reflects the
positive coefficient of GDP2 lend credence to the existence of the rate at which the LCF converges toward the point of long-term equi-
LCC hypothesis. According to the findings, the LCF increases as a librium in response to any shock that occurs in the short run due to a
result of a rise in wealth when the level of economic growth is rela- change in another variable. The negative coefficient value of ECT
tively high; however, when the level of economic growth is relatively (0.861) indicates that LCF will revert to its long-term equilibrium point
low, the LCF decreases as a result of the high use of fossil fuels and at a rate of (86%) within a year.
the existence of weak ecological rules. Furthermore, estimated find- After utilizing the CS-ARDL approach to conclude the long- and
ings indicate that trade openness in G-7 economies had a significant short-term associations between the study variables, verifying the sta-
negative impression on the LCF. These results suggest that trade bility of the model's predictions through validation is essential. The
activities harm environmental quality by lowering the LCF. More pre- authors performed a robustness check to assess the degree to which
cisely, the findings revealed that a 1% upsurge in trade activities the estimated findings are sensitive to changes in the model descrip-
reduces the level of LCF by (0.044%). tion. Following the previous investigations (Khan et al., 2022; Dai
In addition, Table 7 displays the outcomes of the short-run inves- et al., 2024), the current study used the FMOLS and DOLS estimators
tigation. Results for the short-run are consistent with the long-run to estimate the long-run associations for the underlying variables. The
estimations, according to the CS-ARDL investigation. The results sug- results from both models are presented in Table 8. The findings of
gest that green investment and environmental policy stringency both estimators are robust and statistically significant, validating the
reduce environmental degradation by improving the level of LCF, significance and direction of the explanatory factors. The FMOLS and
while FD and NRR reduce LCF and accelerate environmental degrada- DOLS estimates confirm a significant and positive connection
tion for G-7 countries. Moreover, the results show that GDP is nega- between green investment and environmental policy stringency on
tively linked with LCF and increases environmental degradation, the LCF. This infers that GI and EP improve environmental sustainabil-
whereas GDP2 plays a constructive role in environmental ity. Whereas financial sector development and the rise in natural
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 15

resources rent mitigate the LCF and, as a result, degrade the environ- made popular by Dumitrescu and Hurlin (2012), and the estimated
ment. In addition, GDP has a negative relationship with LCF, while outcomes are presented in Table 9. The Wald test statistics test the
2
GDP shows a positive association with LCF in both approaches. H0 of no causal connection. The estimated outcomes have stated sig-
These outcomes confirm the existence of the LCC hypothesis. Finally, nificant Wald test statistics at a 1% and 5% significance level. There-
the findings of trade openness in both models suggest that a rise in fore, we can reject the proposition of no causal relationship. The
trade activities harms the environmental quality of G-7 nations. We outcomes from causality analysis demonstrate that unidirectional cau-
found that the conclusions drawn by FMOLS and DOLS estimators sality runs from EPS to LCF and FD to LCF. This supports previous
align with the CS-ARDL results. Figure 7 represents the summary of findings that any shift in the aforementioned factors will affect the
CS-ARDL, FMOLS, and DOLS outcomes. LCF. Further, the outcomes affirmed a feedback (bidirectional) causal
In the final step, evaluating the causal association and causality connection between GI and LCF. The bidirectional connection
direction between research variables in addition to CS-ARDL, FMOLS, between GI and LCF indicates that causality extends from GI to LCF.
and DOLS is imperative. However, the results from these techniques Since raising the GI will enhance ecological sustainability, a decrease
provide a useful interface, but these approaches lack the directional in the LCF will encourage the authorities to promote the GI to
flow between the variables, which is crucial for drawing policy conclu- increase the LCF. Similarly, findings also observed a feedback connec-
sions. To this end, this study used the panel Granger causality test tion between NRR and LCF, GDP and LCF, GDP2 and LCF, and TRD
and LCF. These causality results indicate that any policy-level changes
in GI, EP, FD, NRR, GDP, GDP2, and TRD can greatly impact the G-7
countries' environmental sustainability.

4.2 | Discussion of results

Considering the effects of green investment, the estimated

results show that GI has a significant positive relationship with the
LCF and improves environmental sustainability in the examined coun-
tries. The retrieved outcomes are consistent with the findings of (Shu
et al., 2023; Javed et al., 2023; Jiang et al., 2024; Sun et al., 2022;
Ahmad & Wu, 2022; Caglar & Yavuz, 2023). Green investment boots
the level of LCF and enhances ecological sustainability since increas-
ing the amount of money spent on research and development could
be a step toward more sustainable economic practices for the world's
economies. The enhancement of R&D investment encourages the
FIGURE 7 Graphically representation of the empirical outcomes. development of environmentally friendly technologies and the

TABLE 9 D-H panel causality.

Null hypothesis W-stat. Zbar-stat. Prob. Remarks
GI ≠ LCF 5.196*** 3.299 .000 Feedback
LCF ≠ GI 8.327*** 6.737 .000
EP ≠ LCF 5.855*** 4.023 .000 Unidirectional
LCF ≠ EP 3.049 0.942 .346
FD ≠ LCF 7.653*** 5.996 .000 Unidirectional
LCF ≠ FD 2.095 0.105 .916
NRR ≠ LCF 5.395*** 3.518 .000 Feedback
LCF ≠ NRR 5.782*** 3.943 .000
GDP ≠ LCF 6.693*** 4.943 .000 Feedback
LCF ≠ GDP 5.308*** 3.422 .006
GDP2 ≠ LCF 6.639*** 4883 .000 Feedback
LCF ≠ GDP 2
5.321*** 3.436 .000
TRD ≠ LCF 8.072*** 6.457 .000 Feedback
TRD ≠ LCF 6283*** 4.42 .000

Note: ***, ** & * denote significance level at 1%, 5%, &10%.

 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
16 JAVED ET AL.

transition toward clean energy, which in turn further improves the our study are in contrast to (Khan et al., 2021; Samour et al., 2022;
productiveness and efficiency of available resources. The develop- Shahbaz et al., 2013).
ment of environmentally friendly technologies encourages the use of Furthermore, the estimated outcomes revealed a significant nega-
clean energy, smart machinery, and other applications, as a result, tive relationship between natural resources rent and the LCF, illustrat-
improves energy efficiency, decreases the utilization of natural ing NRR as a major cause of environmental damage across the G-7
resources, and generates less waste and ecological damage during the nations. This finding aligns with the generally accepted notion that
production and consumption processes, ultimately resulting in envi- the extraction of natural resources is a major contributor to ecosys-
ronmental stability. tem imbalances. These ecological imbalances lead to a rise in the eco-
Additionally, the outcomes of the study suggest that environmen- logical footprint and a decline in the biocapacity. Further, this
tal policy has a significant beneficial influence on the LCF in the negative connection between NRR and LCF can be justified because
examined nations. This illustrates that implementing stringent envi- the underlying countries are among the most industrialized nations in
ronmental policies improves the quality of the environment. For the world and make significant contributions to production and con-
instance, implementing stringent environmental policies imposes sumption activities. As a result, increased industrial and commercial
direct or indirect expenses on the actions that harm the environmen- operations necessitate a greater exploitation of natural resources such
tal quality. This strategy encourages firms and businesses to increase as land, water, and energy consumption. More pressure on ecosys-
the usage of environmentally friendly technology and green energy in tems from growing demand for natural resources could lead to defor-
their production process. This leads to a more effective utilization estation, habitat loss, increased ecological footprint, and a lower
of resources and energy and a reduction in the amount of environ- sustainability limit. Consequently, the rise in the natural resources rent
mental degradation that occurs. Additionally, it is believed that negatively affects the sustainability of the environment. The findings
environmental taxes influence the consumption behaviors of the peo- corroborate those of Dai and Du (2023), Miao et al. (2022), Lee et al.
ple and encourage them to make use of products that are more cost- (2023), He et al. (2023), and Ullah et al. (2021), who also concluded
effective and more environmentally friendly. The analysis highlights that the harmful impact of natural resource rent on environmental
the importance of strengthening environmental legislation in G-7 quality.
economies to promote environmental sustainability and mitigate Further, the results show a negative association between eco-
environmental degradation. These findings are in line with those nomic growth and LCF, meaning more economic activity leads to
found in earlier studies carried out by Shen et al. (2020), Yirong more environmental damage. On the flip side, the LCF is impacted
(2022), Afshan et al., (2023), and Liu et al. (2023). These studies positively by the square term of economic growth. These results show
emphasized the beneficial effects of stringent environmental policies that the relationship between economic growth and LCF is U-shaped
on environmental health. and confirms the validity of the LCC hypothesis in G-7 nations. The
Next, the findings revealed a significant negative impact of finan- LCC theory explains that in the initial phases of economic growth,
cial development on environmental quality. This demonstrates that the scale effect exacerbates environmental degradation by causing
financial development contributes to the degradation of environmen- excessive consumption of natural resources and fossil fuel energy.
tal sustainability by lowering the level of LCF in the underlying coun- However, once the economy reaches a certain threshold level of
tries. Regarding this adverse impact of financial development on growth, further economic development reduces environmental depri-
environmental health, it can be argued that financial sector develop- vation by constructing smarter infrastructure, implementing environ-
ment boosts the availability of capital for investment projects, leading mentally friendly policies, and more innovative solutions. The
to a rise in the consumption of natural resources and fossil fuel energy existence of the LCC theory in G-7 nations suggests that these coun-
and the production of industrial waste by manufacturing businesses tries have achieved a certain level of economic growth and are moving
(Kartal et al., 2023). Without appropriate environmental laws and toward green growth with the aid of stringent environmental policies,
incentives, financial sector development might emphasize short-term the development of environmentally friendly technologies, and the
profits by investing in environmentally harmful production processes usage of clean energy sources in the consumption and production
and technologies rather than long-term sustainability. This can lead to process. This helps to increase LCF and reduce environmental degra-
insufficient investment in environmentally beneficial activities, green dation by improving biocapacity and lowering the ecological footprint.
technologies, and clean energy sources. Because of this, the govern- This outcome is consistent with the results of (Pata and Kartal, 2023;
ments of the G-7 nations ought to encourage the country's financial Dogan and Pata, 2022; Erdogan, 2024). These studies confirmed the
sector to participate in actions that enhance investment in clean existence of the LCC hypothesis. However, the discovery of a
energy sources and develop environmentally friendly technologies. In U-shaped LCC hypothesis contrasts with the findings of (Pata &
this way, G-7 countries must ensure the availability of funds at low Isik, 2021; Khan et al., 2022; Aydin & Degirmenci, 2024), who found a
and interest-free rates from financial institutions to firms and busi- linear relationship between economic growth and LCF.
nesses that invest in advancing green energy technologies. This out- Last but not least, the study's results imply that trade openness
come is in harmony with the findings of (Usman et al., 2022; Sheraz negatively impacts the quality of the environment, which suggests
et al., 2022; Khan & Hou, 2021; Kirikkaleli et al., 2022), who discov- that trade activities contribute to the degradation of the environment
ered that FD harms environmental health. However, the findings of by reducing the level of LCF. This negative association between TRD
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 17

and LCF can be explained by the justification that the underlying worsening environmental quality. Further, the results revealed that
countries are the world's most advanced and industrialized nations economic growth in G-7 countries is negatively linked with LCF and is
and have shown greater economic growth. As a result, high income sensitive to the natural environment, while economic growth square
levels and investment generate demand that could be satisfied is positively associated with LCF. These results confirm the validity of
through trade. Thus, increased production and trade activities require the load capacity curve (LCC) hypothesis in the region. In addition, the
extensive utilization of natural resources and energy, leading to CS-ARDL model's findings are also ratified by FMOLS and DOLS esti-
decreased biodiversity, a rise in the ecological footprint, and industrial mators. Moreover, the empirical outcomes of the D-H panel Granger
waste. Without adequate regulation and enforcement, businesses causality revealed a unidirectional causality from EP and FD to LCF.
may prioritize expanding their profits over protecting the environ- Furthermore, the results demonstrated a bidirectional (feedback) cau-
ment, which can have adverse effects on the natural world. Therefore, sality from GI, NRR, GDP, GDP2, and TRD to LCF.
trade activities have unfavorable effects on the ecosystem and lessen Our research findings are crucial and have insightful policy recom-
ecological sustainability in the sample countries. Our study's outcomes mendations for the governments of G-7 nations that can help them
align with those of (Li et al., 2021; Ali et al., 2020; Adebayo achieve the SDGs and meet their commitments to COP26. First of all,
et al., 2023; Bai et al., 2023), who claimed that TRD adversely impacts after discovering the beneficial effects of green investment and EPS
environmental sustainability. Further, this research is carried out in on the environmental quality proxied through the load capacity factor,
the context of advanced economies of the G-7, but its findings can be we recommend that green transition and environmental stringency
applied to other emerging economies and nations that share compara- are effective policy tools to achieve the SDGs of clean energy and
ble economic, technological, social, and official systems. environment and to fulfill the COP26 targets of net zero emissions.
The results suggest that green investment not only enhances environ-
mental sustainability through the utilization of clean energy, decreas-
5 | C O N CL U S I O N A ND P O LI C Y ing energy intensity, and the development of environmental
RECOMMENDATIONS sustainability technologies, but it also boosts economic growth by
creating job opportunities, expanding businesses, and, as a result,
The present study probes the role of green investment and environ- improving the quality of life. Thus, GI is beneficial in reducing waste
mental policy stringency on the LCF in the seven most developed and traditional energy consumption, fostering the growth of renewable
nations in the world, also known as the G-7 countries. Additionally, energy sources and environmental-related technologies, reducing or
the influence of financial sector development, natural resources rent, eliminating reliance on polluting fuels, guaranteeing energy indepen-
and trade openness in the framework of LCC theory is also investi- dence, and bolstering the decarbonization of the economy to ensure its
gated, with a specific focus on the 30 years spanning from 1990 to long-term viability. Further, it is highly recommended that G-7 authori-
2019. The research results began with identifying the statistically ties encourage and incentivize financial investment in research and
challenging aspects of panel data management. For this reason, we development for environmentally friendly technologies, R&D for clean
used the BP-LM, PS-LM, and PS-CSD tests for CSD and slope hetero- energy sources, environmental-related R&D, and promoting environ-
geneity of Pesaran and Yamagata (2008), respectively. Next, the sta- mentally friendly regulations. This will promote a culture of clean
tionarity descriptions of the examined variables are evaluated through energy utilization and adopting eco-friendly technologies, reducing the
the CADF and CIPS stationarity tests. In addition, the Westerlund amount of energy consumed by production activities and services. As a
(2007) cointegration approach is utilized for cointegration analysis. result, the LCF level will improve, making the environment more sus-
The result of these tests confirms the presence of CSD and SCH. Fur- tainable. In a nutshell, it is vital to maintain R&D efforts in clean energy,
ther, the outcomes also demonstrate a stable and long-term relation- green technology, and related sectors to address environmental con-
ship among the examined research factors. Since the panel data cerns and improve the overall quality of the environment. These initia-
shows the issues of CSD and SCH, the dynamic connections between tives help make the world a better home for present and future
research variables are estimated using the CS-ARDL method devel- generations by making it more sustainable and resilient.
oped by Chudik and Pesaran (2015). In addition, we investigated the Further, the results obtained from our study show that stringent
FMOLS and DOLS approaches to examine the stability of the environmental policies have a significant and powerful influence on
CS-ARDL estimates. Finally, the D-H panel Granger causality method the level of LCF in G-7 economies. In this regard, the current study
evaluates the causal relationship between research variables. claims that environmental policies may affect ecological sustainability.
The empirical outcomes of the CS-ARDL approach corroborate Based on our findings, we highly recommend that the governments of
that green investment and environmental policy stringency positively G-7 countries continue to impose strict environmental policies on
and significantly influence the LCF in both the long- and short-run. businesses and firms, as doing so would encourage enterprises to use
Consequently, it has been established through empirical results that clean energy sources, improve energy efficiency, and increase their
these indicators contribute significantly to the preservation of envi- capacity to develop environmentally friendly technologies. Among the
ronmental health. Contrary to this, financial development, natural many stringent environmental policies, environmental taxation is an
resources rent, and trade activities have a significant negative rela- effective policy instrument for maintaining a sustainable environment
tionship with LCF and are portrayed as the region's main sources of since it helps reduce fossil fuel utilization and lowers ecological
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
18 JAVED ET AL.

deprivation. Environmental taxes offer individuals and firms a financial Moreover, the empirical outcomes of our study suggest an
incentive to decrease the negative effects of their activities on the adverse connection between natural resource rent and environmental
environment. Governments should support the development of envi- sustainability. The outcomes suggest that G-7 countries' heavy reli-
ronmentally friendly technology and practices by levying taxes on ance on industrial manufacturing puts enormous pressure on the
activities that contribute to environmental degradation or the exhaus- extraction of natural resources and consumption of fossil fuels. For
tion of natural resources. In addition, enacting environmental tariffs instance, Canada and the USA are one of the leading resource extrac-
stimulates firms to invest in R&D for cleaner energy and technologies. tion countries in the world for different resources such as natural gas,
This benefits both the environment and the economy. Besides, this oil, minerals, and metals. The massive pressure on the mining of natu-
has the potential to result in the creation of new products and pro- ral resources is responsible for a variety of problems, including the
cesses that are friendlier to the environment. Further, the revenue destruction of forests and contamination of the air, which together
raised from these levies should be utilized to facilitate R&D activities lead to the degradation of the environment. The governments of G-7
for environmental protection, clean energy sources, and advancing countries must implement and strictly enforce stringent environmen-
eco-friendly technologies. Thus, G-7 nations can improve their level tal laws and regulations to control the excessive extraction of
of LCF and contribute to a cleaner and more environmentally friendly resources. Besides, sustainable practice norms, environmental impact
future by implementing stringent environmental policies. evaluations, and strict punishments for violations should all be
Further, our findings provide evidence that financial development included. Further, decision-makers should formulate policies to boost
lowers the level of LCF and contributes to the degradation of environ- investment in ecologically sustainable technologies and cutting-edge
mental health in G-7 countries. Therefore, these countries' financial environmentally friendly resource extraction techniques. Businesses
sector policies must be revised. Specifically, it is most important that should be encouraged to invest in the rebuilding and restoration of
the financial sector focus on the green economy and an ecologically areas that have been disturbed by extraction. Reforestation, restoring
sound environment. Literature has proven the significance of the finan- natural habitats, and other similar projects can help lessen humans'
cial sector in the green transition process. In this context, G-7 authori- environmental impact over time. The G-7 nations should expand their
ties and policymakers should make incentive mechanisms operational cooperation with other nations and international organizations to
for the financial sector and business owners so that they can finance exchange best practices for technology, research, and resource extrac-
clean energy, the development of eco-innovation, and environmentally tion. There needs to be collective action to address the world's envi-
beneficial projects. Even though the G-7 countries are highly developed ronmental problems. Together, these approaches can help the G-7
economies with well-developed financial systems and stringent envi- countries strike a better balance between economic progress and
ronmental management policies, these nations are still facing challenges environmental protection by reducing the destructive impacts of
in their pursuit to maximize the green transition process. There is a dire resource exploitation while maintaining a healthy ecosystem.
need to formulate comprehensive environmental policies that can Further, the outcomes of our study provide strong evidence of
increase the development and adoption of green technology innovation the legality of the LCC proposition, suggesting that the quality of the
and clean energy sources and guarantee sustainable energy alongside environment can be enhanced over time with rising income levels and
economic growth without negatively impacting the environment in the indicating that the technique effect would dominate the scale effect
G-7 countries, all of which have diverse institutional, financial, and eco- in G-7 countries. The harmful environmental effect can be lessened
nomic structures. Further, governments should develop efficient finan- by improved technology and increased understanding of environmen-
cial strategies to encourage the financial sector to develop novel green tal issues in the expanding economies of G-7 nations. The G-7 gov-
products within the reach of all economic agents, such as businesses, ernments can help boost the level of LCF by allocating more
households, and government institutions. In addition, the government resources to green causes, like funding R&D for renewable energy
should develop and launch public awareness campaigns and outreach sources, advancing green technology innovations, and financing envi-
initiatives to encourage the general population to use available financial ronmental awareness campaigns. Additionally, as people's purchasing
resources for environmentally friendly technologies and practices, such power rises, their interest in and appreciation for environmentally
as solar panels, energy-efficient buildings, home appliances, electric friendly products, services, ecosystems, and coastal and inland regions
vehicles, and so on. The government must carry out these programs. It grows. People with higher incomes care more about environmental
is highly recommended that the governments of the G-7 nations work issues. In this context, authorities in the G-7 countries can aid in
together with the private sector to promote green investment of at achieving SDGs 7, 13, and 15 by converting economic development
least one hundred billion dollars annually in the renewable energy sec- into green growth.
tor. As a result, the public-private partnership offers green funding for Although this study provides a more comprehensive analysis, this
the energy transition and sustainable development. The G-7 countries' research has some limitations. The shortcomings of the present study
proactive environmental stringency policies help ensure that the finan- set the way for important new areas of research that can be explored
cial resources allocated to the energy industry are used most effec- in future studies on environmental sustainability. First, the focus of
tively. For this reason, policymakers need to link the work of regulatory this study is limited to G-7 countries; however, other regions such as
institutions with the financial system to achieve an inclusive green E-7 economies, OECD member nations, MENA countries, and newly
growth strategy and a sustainable energy transition. industrialized and top renewable energy investor nations could be
 10991719, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/sd.3192 by Cumhuriyet University, Wiley Online Library on [04/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
JAVED ET AL. 19

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