Abstract

This study employs a Vector Autoregression (VAR) approach to analyze the dynamic link between sustainable finance and environmental results in Arab nations from 1980 to 2024. The research considers major financial indicators, such as financial development and domestic credit, as well as macroeconomic factors including economic growth, government expenditure, capital formation, and population growth, to evaluate their influence on CO₂ emissions.

Empirical data show that CO₂ emissions persist, indicating the region's environmental deterioration is structural. Financial development and domestic credit have a considerable, time-dependent impact on emissions. Financial expansion is connected with increasing emissions in the short term, consistent with the scale effect, but its influence varies with time, showing incremental adjustments due to efficiency improvements and structural changes. Macroeconomic and demographic dynamics, notably population growth and capital creation, have a crucial effect in influencing environmental outcomes, but GDP per capita growth and government spending have less direct influence.

Granger causality tests, impulse response functions, and variance decomposition all provide more evidence that dynamic interactions and delayed adjustment mechanisms exist between financial systems and environmental performance. Overall, the findings indicate that sustainable finance influences environmental outcomes through complex and evolving channels, and that its efficacy is dependent on larger structural and institutional factors. These findings have significant policy implications for linking financial development with environmental sustainability goals in Arab economies.

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