Unravelling the Conditional Effects of Institutional Quality in ECOWAS in the Assessment of the Influence of Financial Development on Environmental Sustainability

Abstract

This study investigates whether institutional quality conditions the effect of financial development on environmental sustainability in the fifteen ECOWAS countries during 1990–2024. Existing research largely assumes a direct finance–environment relationship, overlooking how governance shapes environmental outcomes of financial development. Addressing this gap, the study develops an institutional moderation framework and estimates a cross-sectionally augmented autoregressive distributed lag model, complemented by augmented mean group and common correlated effects mean group estimators for robustness. Results show that financial development increases environmental degradation under weak institutional conditions but significantly improves sustainability when governance strengthens. Specifically, better rule of law, regulatory quality, and government effectiveness enhance resource allocation, regulatory compliance, and investment in environmentally sustainable activities. The significant error-correction term confirms long-run equilibrium, while robustness tests support the stability of the findings. However, the study demonstrates that institutional quality is the critical mechanism through which financial development advances environmental sustainability, highlighting governance reforms as a priority.