Sustainability Through Policy Stringency: Analysing the Impact on Financial Development

This study investigates the relationship between environmental policy stringency and financial development across 40 countries from 1990 to 2021. Using the Environmental Policy Stringency Index (EPSI) to measure environmental regulations’ rigour, we explore how these policies impact financial development, particularly focusing on financial institutions and markets. The analysis employs Ordinary Least Squares (OLS) and Fixed Effects (FE) models to capture the dynamic interactions between environmental policies and financial systems. Our findings indicate that stringent environmental policies have a positive and significant impact on financial development, mainly through enhancing financial market depth and efficiency. However, the results also reveal that financial institutions may face challenges under stringent regulations, particularly in terms of reduced access to financial services. These findings contribute to the ongoing dialogue on the economic implications of environmental policies, offering valuable insights for policymakers aiming to balance environmental sustainability with financial development.