Ecological Sustainability in the Era of Financial Globalization: The Role of Environmental Diplomacy and Policy Stringency in G20 Nations

Abstract

This research explores the intricate interplay among financial globalization (FG), economic development (ED), gross domestic product (GDP), and environmental policy stringency (EPS), and their combined influence on environmental sustainability, as assessed by the Environmental Footprint Performance Index (EFPI) in G20 countries Employing panel data spanning from 1995 to 2022, the analysis utilizes Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) modeling, Pedroni and Westerlund cointegration tests, and Dumitrescu-Hurlin panel causality analysis to investigate both short- and long-term impacts. The findings reveal that FG, ED, and GDP impose long-term pressures on environmental sustainability, while EPS serves as a vital factor indicating that robust environmental policies can mitigate the adverse. Nevertheless, the negative interaction between FG and EPS implies that unchecked financial integration may undermine the efficacy of environmental policies, underscoring the necessity for coherent financial governance and sustainability strategies. In the short term, policy shifts incur adjustment costs, yet the error correction model (ECM) indicates a moderate pace of equilibrium restoration, reflecting the resilience of the system. These results highlight the importance of embedding sustainability within financial globalization through green finance, responsible investment strategies, and more stringent environmental regulations. Policy suggestions include enhancing global financial governance, fostering sustainability-oriented investments, and strengthening international environmental collaboration within the G20 framework to secure long-term ecological resilience.

Keywords: Environmental Policy Stringency, Financial Globalization, Environmental Diplomacy,  Ecological Footprint Pressure Index, PMG-ARDL, G20 Countries