Examining the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation: evidence from G20 countries

Hordofa, Dereje Fedasa Article Examining the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation: evidence from G20 countries Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Hordofa, Dereje Fedasa (2024) : Examining the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation: evidence from G20 countries, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-27, https://doi.org/10.1080/23311975.2024.2368709 This Version is available at: https://hdl.handle.net/10419/326358 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Examining the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation: evidence from G20 countries Dereje Fedasa Hordofa To cite this article: Dereje Fedasa Hordofa (2024) Examining the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation: evidence from G20 countries, Cogent Business & Management, 11:1, 2368709, DOI: 10.1080/23311975.2024.2368709 To link to this article: https://doi.org/10.1080/23311975.2024.2368709 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 21 Jun 2024. Submit your article to this journal Article views: 1604 View related articles View Crossmark data Citing articles: 3 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 ACCOUNTING, CORPORATE GOVERNANCE & BUSINESS ETHICS | RESEARCH ARTICLE Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2368709 Examining the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation: evidence from G20 countries Dereje Fedasa Hordofa Department of economics, Dire Dawa university, Dire Dawa, ethiopia ABSTRACT Previous studies examined sustainability-innovation and banking-innovation linkages separately. This research addresses that gap by jointly analyzing the relationships between environmental sustainability, five banking performance metrics, and technology innovation in G20 nations from 1990 to 2022. The study constructs a banking performance index from five indicators, including return on assets, equity, deposits as a percent of GDP, risk scores, and market capitalization. A comprehensive IV-GMM approach controls for endogeneity using lagged variables as instruments in a two-step GMM model, along with the Lewbel method. Additional robustness is provided by cross-sectional, time-series FGLS regression. Results show sustainability consistently boosts innovation directly. However, examining individual banking metrics reveals that the performance index negatively correlates with innovation, excluding risk scores. Most interaction terms mirror sustainability’s influence, though returns and concentrations diverge. Introducing interaction terms also inverts prior index relationships at times. Analyzing direct, interactive, and net impacts offers different views than indexing alone. The performance index positively links to net analyses versus other specifications. Overall, the findings provide empirically grounded insights into these dynamics within influential nations. Non-linearities are observed between aggregate and disaggregate banking indicators. Considering metrics from diverse analytical angles through a multidimensional lens informs optimized policy balances. 1. Introduction Considering the significant influence of major economies’ policies on global sustainability, it is important to explore the relationship between banking sector performance, environmental regulations, and green innovation within G20 nations. The G20’s significant global economic influence and population size present great potential for maximizing the benefits of effective collaboration. Although previous studies have provided valuable insights, there are still some gaps that the current research aims to address. Striking a balance between environmental sustainability and economic growth is a persistent global challenge, as highlighted by the Intergovernmental Panel on Climate Change (Bannerman, 2020; Guang‐Wen etal., 2023) All sectors must make efforts to achieve the ambitious global goals related to addressing climate change. The banking sector plays a vital role in directing capital towards various business activities (Shahab et al., 2018). Simultaneously, advancements in environmental technology are driving the development of solutions that can effectively decarbonize economies and mitigate various impacts (Hsu et al., 2021). Recent research has examined multiple factors that impact environmental sustainability and innovation. Studies have demonstrated that governance mechanisms such as board diversity (Elmagrhi et al., 2019) and sustainability committees (Tran et al., 2021) have a positive influence on disclosure and performance. However, it has been found that stricter regulations do not enhance the role of boards in © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT Dereje Fedasa Hordofa derejef[email protected] Department of economics, Dire Dawa university, Dire Dawa, ethiopia. https://doi.org/10.1080/23311975.2024.2368709 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY Received 12 October 2023 Revised 11 June 2024 Accepted 12 June 2024 KEYWORDS Banking sector performance; environmental sustainability; technological innovation; G20 countries; IV-GMM JEL CLASSIFICATIONS G21; O30; Q55; Q56 REVIEWING EDITOR Collins Ntim, University of Southampton, United Kingdom of Great Britain and Northern Ireland SUBJECTS Economics; Finance; Environmental Economics; International Economics 2 D. F. HORDOFA promoting disclosure (Tran et al., 2021). Peer effects can also serve as a motivation for innovation, as firms tend to imitate perceived leaders in the field (Machokoto etal., 2021). Initiatives that are associated with markets do not always lead to desired outcomes and instead may contribute to the perception of ‘greenwashing,’ as described by Haque and Ntim (2022) and Orazalin et al. (2024). Sharing credit information has been found to decrease loan defaults, but this effect is dependent on the level of concentration, as shown in a study by Fosu etal. (2020). Nevertheless, the quality of governance had a minimal effect on mitigating these impacts. Sustainability is influenced by policies, leadership, peers, and disclosure, as indicated by Elmagrhi etal. (2019) and Shahab etal. (2020). However, symbolic actions occasionally deviate from bringing about substantial change, as noted by Haque and Ntim (2022) and Orazalin et al. (2024). Considering the significant influence of major economies’ policies on global sustainability, it is necessary to investigate the relationship between the performance of the banking sector, environmental regulations, and green innovation in G20 nations. The G20, which represents more than 85% of global GDP and two-thirds of the world’s population (Wang & Dong, 2021) has the potential to generate significant advantages by maximizing cooperation and collaboration between these domains. Although previous studies have provided valuable insights, there are still certain gaps that the current research aims to fill. The simultaneous pursuit of environmental sustainability and economic growth poses a persistent challenge for nations globally (Haque & Ntim, 2018). Comprehensive measures are required in all industries to achieve ambitious global objectives related to climate change mitigation. The banking sector plays a crucial role in directing capital towards business. Simultaneously, the advancement of environmental technology fosters solutions that can facilitate the reduction of carbon emissions in economies and mitigate various environmental consequences (Hsu et al., 2021). Research has established connections between financial development, sustainability, and innovation on a global scale (Hsu et al., 2021; Liu et al., 2021). Technological advancements contribute to the reduction of emissions and support sustainable economic growth (Abid et al., 2022). Various quantitative methods, such as data envelope analysis (DEA), regression, and panel analysis, have been used to evaluate the relationships between variables (Anser etal., 2020; Khattak et al., 2020; Liu et al., 2021). These studies suggest the presence of nonlinear effects in the environmental Kuznets curve. Prior analyses have examined the connections between financial development, sustainability metrics, and green innovations. Multiple studies (Cao etal., 2021; Lv etal., 2021; Umar & Safi, 2023) have identified that the implementation of policies that promote renewable energy, environmentally-friendly technologies, and robust institutions has a consistent and positive impact on reducing emissions and improving sustainability over a period of time. Digital finance plays an active role in driving innovation in green technology, especially in areas where traditional finance falls short. Various factors, such as the implementation of renewable energy, advancements in green technology, and the quality of policies and regulations, can have a non-linear impact on outcomes, which is dependent on the initial conditions (Anu et al., 2023; Y. Sun et al., 2022) Prior research has primarily focused on assessing the influence of factors like sustainability and financial development on technological progress alone (Hsu et al., 2021). However, this approach overlooks the potential feedback effects of innovation on sustainability outcomes, resulting in an incomplete understanding. Despite the close interconnection of financial, policy, and research and development (R&D) domains in reality, previous studies have not extensively examined the potential benefits of effectively aligning economic, regulatory, and innovation strategies (Lv etal., 2021). Furthermore, the practice of examining individual elements separately is more common than conducting integrated analyses that unravel the interactions between banking, regulations, and cutting-edge solutions (Liu et al., 2021). A limited concentration hinders the exploration of how optimizing the harmony between these domains could result in significant environmental advantages, given that major nations have a disproportionate influence on global affairs. Conducting focused studies on connections within influential G20 settings could help address these empirical limitations and provide a deeper understanding. While some information is available, extensive research specifically focusing on these dynamics within the influential G20 group of countries remains lacking. This study aims to fill this gap by examining the correlations between the performance of the banking sector, measures of environmental sustainability, and the innovation of environmental technology in G20 countries. This study will examine how variables such as investments in renewable energy and green innovations affect emission levels and patterns of resource consumption. The purpose of insights is to provide information COGENT BUSINESS & MANAGEMENT 3 for G20 nations that are looking to promote economic development and environmental stewardship through their policies. The objective of this study is to gain new insights into the relationship between banking, sustainability, and innovation. It focuses on examining the technological impact of sustainability and the potential influences of banking. Many G20 nations are setting long-term development goals, but achieving environmentally sustainable growth is challenging and requires further investigation in different economic contexts (Alam et al., 2022; W. Cai & Li, 2018; Lu & Chesbrough, 2022). Efficiency and environmentally friendly manufacturing have improved in G20 countries. However, there are still obstacles that hinder economically sustainable progress. A deeper understanding of global production and consumption challenges is necessary to overcome these obstacles. Furthermore, it is crucial to analyze the connections between finance, technology, and environmental performance among G20 nations at a regional level. However, our understanding of the relationship between these factors remains incomplete (Cao et al., 2021; Kurniawan et al., 2023). This research, driven by a desire to address knowledge gaps, diligently examines the key factors involved in evaluating the influence of sustainability on technological advancement and explores the potential role of banking in this context (Jiakui et al., 2023). According to Ozturk et al. (2023), achieving long-term prosperity heavily depends on the extensive implementation of environmentally conscious innovation and resilient growth. Within the G20, there are opportunities to develop cost-effective green industries and transportation by reducing sustainability costs. Moreover, promoting environmental economic growth requires strong strategies that support the advancement of eco-technology in G20 countries (X. Sun etal., 2023). Implementing effective regulations is a strategy for achieving goals related to clean energy and sustainable finance. This approach promotes progress towards environmentally conscious prosperity by enforcing strong policies and penalties (Abbas et al., 2023; Hasan & Du, 2023; Saeed Meo & Karim, 2022; Yi, 2023). By meticulously analyzing the key themes related to research questions, my objective is to offer comprehensive insights that address the existing gaps among G20 countries. Several previous studies offer pertinent context for analyzing the interplay between banking, sustainability, and innovation in G20 nations. However, significant research areas remain unexplored. Liu et al. (2021) and Y. Sun et al. (2022) conducted cross-country analyses that provided broad insights but did not specifically focus on the significant G20 bloc. Raza et al. (2023) and Ozturk et al. (2023) used panel methods to assess the factors that influenced sustainability measures in G20 countries between 1990 and 2020. Although both analyses provided information, neither of them included an examination of the banking sector component. The goal of this present study is to build on previous research by focusing solely on the G20 group. Because they are the world’s major economies, the G20 members have a significant impact on global target achievement. Therefore, insights focused on the G20 are particularly valuable. However, we have not fully elucidated the complex connections between financial performance, environmental endeavors, and technological solutions in this crucial group. This study aims to address various significant knowledge gaps by examining the interplay between banking, sustainability, and innovation within the G20 framework. Specifically, no previous study has conducted a combined analysis of financial support provision, environmental regulations and impacts, and innovation responses for G20 countries. By clarifying these connections, G20 governments can develop comprehensive policy frameworks that promote both economic growth and environmental stewardship. The primary contribution is to provide novel insights that can expedite the achievement of internationally agreed sustainability goals within the influential G20 consortium. Attaining sustainable expansion and fostering eco-friendly advancements are becoming increasingly crucial on a global scale. However, we have not thoroughly investigated the precise mechanisms by which sustainability influences technological progress, nor the influence of contextual factors like banking activity on this relationship. This research was motivated by the need to address these knowledge gaps. The study aims to achieve four research objectives: 1. Assess the impact of the banking industry’s performance on the development of environmental technology innovation in G20 countries. 2. Evaluate the influence of environmental sustainability on the development of technological advancements. 3. Evaluate the influence of the banking industry’s performance with the interaction of environmental sustainability on environmental technology innovation in G20 countries. 4. Analyze the overall net impact of sustainability initiatives on innovation, taking into consideration the influence of financial bank performance. 4 D. F. HORDOFA This research seeks to enhance comprehension of these dynamics within a significant G20 context by empirically examining hypotheses aligned with the objectives. The goal of this study is to provide valuable insights into the connections between the banking sector’s performance, environmental sustainability, and environmental technology innovation. While previous studies have separately examined these subjects, a more comprehensive analysis is necessary to comprehend their intricate interactions and bridge the existing knowledge gaps. This study aims to evaluate the overall impact of environmental sustainability on the advancement of eco-friendly technology. Additionally, it aims to explore the potential impact of banking performance on the connection between sustainability and innovation. By addressing these objectives, we anticipate gaining new empirical knowledge about the influence of sustainability on technological development as well as how contextual factors such as banks may influence this relationship. We will utilize the ecological footprint indicator as a comprehensive gauge of environmental performance, ensuring a thorough examination. Moreover, patents pertaining to renewable energy serve as a representative measure of green innovation. The study aims to first use IV-GMM regression to analyze linkages using the most recent G20 data from 1990 to 2022. This will allow for the investigation of dynamics among these elements over time within the major emitter nations. By closely analyzing well-defined relationships that revolve around the research questions, we anticipate gaining valuable new insights that will advance sustainable development goals. The study is structured into seven sections, commencing with an introduction that offers an overview. Then background information, and a review of theoretical literature, a review of empirical literature, a research design, empirical findings, and a conclusion. 2. Background of study The banking sector’s significance in fostering both economic and ecological welfare cannot be understated (Y. Zhang & Zhou, 2020). Governments increasingly rely on the financial system, especially banking institutions, to develop and implement sustainability regulations aimed at issues like climate change (Orazalin et al., 2024). However, relatively little research has examined how expansion of the banking sector may influence levels of environmental innovation and technological progress, despite acknowledgments of banking’s important contributions to economic growth (Jiakui et al., 2023). As the focus of this study, the G20 bloc accounts for approximately 84% of global economic output (Bannerman, 2020; D’Orazio & Dirks, 2022), making it highly influential. Unsurprisingly, this means G20 nations also represent a considerable portion of worldwide energy consumption and emissions impacts. As shown in Figure 1, China leads G20 energy consumption at an estimated 260 million tons of oil equivalent, followed by the European Union and the United States. This underscores the importance of examining policies within these major demand-side economies. Figure 1, panel b illustrates technology innovation trends as proxied by patent approvals (Lv etal., 2021), displaying China atop G20 nations for eco-innovations, followed by Japan and the United States based on World Intellectual Property Organization statistics from 2000– 2020 (Ozturk et al., 2023). Together, these graphics set the scope of analysis toward the consequential G20 bloc as key leaders in contemporary energy usage (Khattak et al., 2020) and potentially drivers of the solutions needed for transitioning to sustainability goals (Cao et al., 2021; Raza et al., 2023). Growing emphasis exists on strengthening sustainability rules and guidelines within the banking industry as well. New policies aim to promote green growth, renewable energy deployment, and energy efficiency. Effectively carrying out such initiatives crucially involves harnessing support from the finance sector, with commercial banks playing a primary role in efforts to achieve sustainability targets. The intersection between financial systems and innovation has emerged as a facilitator for tackling various environmental challenges through widespread adoption of eco-friendly technologies and renewable resources (Fan et al., 2022). Previous studies provide evidence that well-performing banking sectors can stimulate renewable energy innovation and sustainable development, as seen in China (Li et al., 2023; Y. Zhang & Zhou, 2020). Access to bank resources and support has been shown to significantly contribute to advancing levels of green innovation over time (Chen et al., 2022) Recent analyses also find that banks assisting green initiatives and projects tend to demonstrate strong financial performance themselves (Abbas et al., 2023; Alsagr, 2023). The resources provided through commercial and investment banking activities can substantially impact the implementation of green technologies across different industries (Z. Ahmed et al., 2022; Hunjra et al., 2023). Furthermore, COGENT BUSINESS & MANAGEMENT 5 banking sector performance outcomes seem to correlate closely with enhanced facilitation of wider sustainability efforts. The availability of green venture capital is also dependent on the prosperity of local banking systems (Jiakui et al., 2023; H. Khan et al., 2022). Economic downturns make obtaining financial support more difficult as well (P. Zhang et al., 2023). This study aims to help address gaps in understanding these linkages by comprehensively evaluating the technological effects of sustainability efforts as well as exploring banking sectors’ potential to influence innovation trajectories using data from G20 nations. This will allow for analyses across countries with diverse economic backgrounds, circumstances, and policy environments. Previous work by Yi (2023) examined the interactions between banking performance, environmental sustainability, and eco-technology innovation within the single-country setting of China. Yi acknowledged the importance of these interrelated factors, but he focused on a largely descriptive analysis within national boundaries. The present study aims to build upon this understanding by taking a more comprehensive exploratory approach and investigating the underlying mechanisms and dynamics between these variables across multiple economies. Specifically, this research evaluates these relationships within the diverse and influential group of G20 nations. By examining the broader multi-country context and relationships between intricate factors over time, this study pursues a more sophisticated comprehension of sustainability’s technological impacts beyond the scope of single-nation studies. Expanding analysis to an international scale allows for comparison across different economic backgrounds, circumstances, and policy environments within major globally influential settings. 3.Theoretical literature review 3.1. Contingency theory as an overarching theoretical framework Contingency theory provides a valuable theoretical framework for understanding the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation in the context of G20 nations. This theory suggests that the effectiveness of organizational practices and strategies depends on how well they align with the external environment and internal capabilities of the organization (Lee et al., 2016; Lu & Chesbrough, 2022). By drawing on both classic and recent studies, Figure 1. (a) energy consumption in (mt) and (b) technology innovation (patent applicants) of g20 countries. 6 D. F. HORDOFA we can establish a solid theoretical foundation that links the dependent and independent variables together, allowing us to formulate relevant predictions and hypotheses. 3.2. Banking sector performance and environmental sustainability The first aspect of our theoretical framework focuses on the relationship between banking sector performance and environmental sustainability. Hsu etal. (2021) emphasize the significance of sustainable business performance in the technology industry and highlight the positive impact of eco-innovation practices on economic, social, and environmental performance. This finding suggests that investments in environmental sustainability can lead to improved overall performance. Moreover, Dai (2023) demonstrate that corporate social responsibility (CSR) and green finance positively influence environmental performance. Hence, we hypothesize that a positive association exists between banking sector performance and environmental sustainability, with banks prioritizing environmental sustainability and showing enhanced overall performance. 3.3. Environmental technology innovation and environmental sustainability The second part of our theoretical framework explores the relationship between environmental technology innovation and environmental sustainability. The study by Zakari et al. (2023) underscores the role of eco-innovation strategies, such as eco-process, eco-product, and eco-organizational innovation, in enhancing sustainable business performance. This suggests that technology-driven innovations promoting environmental sustainability can contribute to improved performance outcomes. Furthermore, Dai (2023) find that green innovation mediates the relationship between corporate social responsibility and environmental performance. Based on these findings, we propose a positive association between environmental technology innovation and environmental sustainability, with banks engaging in eco-innovative practices demonstrating a higher level of sustainability (Choubey & Sharma, 2022). 3.4. Linking the variables: the contingent role of market turbulence Expanding on contingency theory, we present the role of market turbulence as a moderating factor in the connection between banking sector performance, environmental sustainability, and environmental technology innovation. According to Lv etal. (2021), market turbulence has the potential to enhance the beneficial impact of eco-organizational innovation on social performance. Therefore, the effect of environmental sustainability initiatives and technological innovation on the performance of the banking sector may differ based on the degree of market turbulence. Thus, we propose that market turbulence influences the connections between the performance of the banking sector and environmental sustainability, as well as between environmental technology innovation and environmental sustainability. Our theoretical framework, based on contingency theory, suggests that there is a relationship between banking sector performance, environmental sustainability, and environmental technology innovation. The framework draws on seminal research such as (Choubey & Sharma, 2022) and Lee etal. (2016) to emphasize the dependent and variable nature of these connections. By integrating recent research, specifically Dai (2023), we improve our comprehension of the favorable connections between banking sector performance, environmental sustainability, and environmental technology innovation. In addition, the researcher introduces market turbulence as a moderating factor, taking into account the contextual influences that may influence these relationships in the Chinese banking sector. 3.5. Theoretical framework This study seeks to thoroughly investigate the impact of banking sector performance on the development of environmental technology innovation and sustainability (Al-Ahdal et al., 2023; Hunjra et al., 2023). This research employs the widely used Stochastic Impacts by Regression on Population, Affluence, COGENT BUSINESS & MANAGEMENT 7 and Technology (STIRPAT) theoretical model to conduct the empirical analysis (Dietz & Rosa, 1997; York et al., 2003). Below is the presentation of IPAT Equation (1). I P AT=** (1) where I represents the impact of the environment, P is the population number, A the affluence, and T the level of technical advancement. Originally developed as an important extension of the basic IPAT identity (Holdren & Ehrlich, 1974), the STIRPAT framework allows investigation of multiple determinants’ effects in a multiplicative form (Dietz & Rosa, 1997) and shows using Equation (2) below: CP A T it it it it αα α ε 123 (2) where Iit represents the environmental impact or outcome of interest for country in time period t. The independent variables include population (P), affluence or wealth (A), and technology (T). The error term is denoted by ε, while C represents a constant and the coefficients for each predictor by α 1, α 2, and α 3 respectively. The subscripts indicate the year and country designation. This analysis focuses specifically on environmental impacts quantified as carbon dioxide emissions levels. Potential driver variables include GDP per capita as a measure of affluence, total population size, rates of innovation as captured by patent approvals, and indicators of banking sector performance such as total assets or loans extended. The following sections aim to empirically test relationships between these factors utilizing panel data techniques applied to the G20 sample over recent decades. Banking performance proxies of index (BP) represent ‘affluence’ (Ch’ng etal., 2021; Creel etal., 2015; Le etal., 2019; Liu etal., 2021). Total patent counts symbolize environmental technologies as the ‘impact’ (Jiakui et al., 2023; Urbaniec et al., 2021). 4. Empirical literature review and hypothesis development Considering the significant influence of major economies’ policies on global sustainability, it is necessary to conduct a more thorough analysis of the relationship between the performance of the banking sector, environmental regulations, and green innovation in G20 countries. Although previous studies have provided valuable insights, there are still certain gaps that the current research aims to fill. Prior research has primarily focused on assessing the influence of factors like sustainability and financial development on technological progress alone (Hsu et al., 2021; Liu et al., 2021). However, this approach overlooks the potential feedback impacts of innovation on sustainability outcomes, resulting in an incomplete understanding of the subject. Previous studies have not thoroughly examined the potential benefits of effectively aligning economic, regulatory, and innovation strategies (Cao et al., 2021; Lv et al., 2021) despite the fact that the financial, policy, and research and development sectors are closely interconnected in reality. Furthermore, the practice of conducting separate examinations of individual elements is more common than conducting integrated analyses that unravel the interactions between banking, regulations, and cutting-edge solutions (Hsu et al., 2021; Khan et al., 2022). A limited concentration hinders the exploration of how maximizing harmony between these domains could result in significant environmental advantages, considering that major nations have a disproportionate influence on global matters. Conducting focused studies on connections within influential G20 settings could help improve our understanding by addressing these empirical limitations. Researchers have thoroughly examined the connections between finance, sustainability, and innovation, suggesting that focused strategies could result in significant returns. Recent evidence suggests that implementing green technologies and allocating funds based on careful selection can effectively reduce emissions at both local and global levels. China, undergoing rapid industrialization, has observed this (Anser etal., 2020; Abid etal., 2022; Hsu etal., 2021; Khan etal., 2022; Khattak etal., 2020). In addition, innovation has a transformative impact by stimulating improvements in efficiency, advancements in clean production, and reductions in carbon emissions that are crucial for both environmental and economic advancement (Abid etal., 2022; Khan et al., 2022). According to certain analysts (Khan et al., 2022), robust socio-political structures also help create favorable conditions for achieving sustainability goals. 14 D. F. HORDOFA and possible endogeneity. Overall, these pre-estimation tests validate the use of advanced econometric techniques in the empirical analysis. As a precursor to the panel data analysis, Tables 6 and 7 report the results of unit root and cointegration tests to examine the time series properties and establish a long-run relationship between the variables. The results of the Fisher unit root test, presented in Table 6, strongly reject the null hypothesis of non-stationarity across all variables at the 1% level, indicating the integration of the variables of order one (I(1)). Given this conclusion, Table 7 then reports the Kao cointegration test, which establishes cointegration between the variables based on the highly statistically significant test statistics. These pre-estimation tests are crucial given that the study examines relationships between environmental sustainability efforts, banking sector performance indicators, and technological innovation levels within the context of influential G20 nations over 1990–2022. Validating that the time series are I(1) and cointegrated provides statistical justification for employing advanced panel cointegration techniques, such as the IV-GMM estimator, in subsequent empirical analyses. This allows for rigorous quantification of direct, interactional, and net impacts aligned with the key objectives (Roodman, 2009). Table 4. slope heterogeneity test. Delta adjusted delta 2.376 4.388 0.017** 0.0000*** note: the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. Table 5. Cross-sectional dependency test. LinnoV LCo2 LgDPpc Roa Roe Bank_Z FsD MC tD BP Pesaran’s test 18.342*** 8.454*** 61.376*** 7.141*** 7.253*** 4.208*** 34.675*** 5.661*** 31.849*** 6.237*** Prob. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. Table 6. Fisher unit root tests. Variables inverse chi-squared p inverse normal Z inverse logit t L* Modified inv. chi-squared Pm Decision Roa 536.1756*** −20.1473*** −35.0238*** 58.9463*** i(1) LCo2 535.0378*** −19.656*** −33.121*** 55.3469*** i(1) LgDPpc 305.887*** −13.9056*** −19.3773*** 30.7287*** i(1) LinnoV 516.5186*** −18.7337*** −32.667*** 54.8898*** i(1) Boe 597.9978*** −21.6505*** −39.063*** 66.2321*** i(1) Bank_Z 469.9287*** −18.967*** −30.698*** 51.139*** i(1) FsD 382.1079*** −16.477*** −25.688*** 42.2143*** i(1) MC 437.5797*** −17.453*** −29.399*** 48.941*** i(1) tD 485.1011*** −18.909*** −30.829*** 51.286*** i(1) BP 249.3371*** −12.531*** −17.265*** 27.167*** i(1) BP_LCo2 253.2115*** −12.635*** −17.532*** 27.6514*** i(1) Roa_LCo2 478.9939*** −18.5272*** −31.282*** 52.2073 i(1) Roe_LCo2 531.027*** −19.9166*** −34.685*** 58.3396*** i(1) Bank_Z_LCo2 424.086*** −17.838*** −27.702*** 45.7364*** i(1) FsD_LCo2 355.519*** −15.764*** −23.892*** 38.990*** i(1) MC_LCo2 446.1540*** −17.576*** −29.966*** 49.981*** i(1) note: since data are unbalanced data, we used Fisher test at difference; the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. Table 7. Panel Kao cointegration tests. tests statistic p value Modified Dickey–Fuller t 1.579 0.0572* Dickey–Fuller t 1.278 0.0000*** augmented Dickey–Fuller t 2.8478 0.0022** unadjusted modified Dickey–Fuller t 0.2807 0.0000*** unadjusted Dickey–Fuller t −0.1211 0.002** the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. COGENT BUSINESS & MANAGEMENT 15 6.3. Econometric results of IV-GMM and interpretation Table 8 displays the findings regarding the influence of banking performance and environmental sustainability on environmental technology innovation within the G20 countries. The dependent variable in this study is technological innovation (LINNOV), which is used as a metric to assess the extent of environmental technology innovation. The econometric results offer valuable insights into the correlation between the performance of the banking sector, environmental sustainability, and the innovation of environmental technology within the G20 countries. The findings confirm the theoretical and empirical foundations discussed in the literature review and provide support for the hypotheses developed in this study. The data presented in Table 8 offers valuable insights into the interplay between banking performance, environmental sustainability, and technological innovation within the G20 nations. In general, the results support the hypotheses and theoretical foundations. The results indicate that there is a strong and statistically significant relationship between environmental sustainability efforts and technological innovation, as evidenced by the positive and highly significant coefficients for LCO2 in all specifications. This supports Hypothesis 2, which suggests that higher sustainability efforts have a positive impact on technological innovation. This is consistent with previous research that has found that policies aimed at reducing emissions stimulate the development of creative solutions (Cao et al., 2021; Lv et al., 2021). Countries that strengthen sustainability regulations witness a corresponding response in terms of innovation. In terms of banking performance, the majority of indicators demonstrate the anticipated negative correlation, as stated in Hypothesis 1. Specifically, ROA, Bank_Z, FSD, and MC have a significant impact on technological progress. This implies that banking systems that perform well have a certain level of influence in promoting innovation, which supports existing theories on the role of finance in development (Creel et al., 2015; Lee et al., 2016; Lv et al., 2021). Nevertheless, the relationship between ROEs was not significant, deviating slightly from the predicted outcome. The findings suggest that a 1% increase in environmental sustainability (LCO2) is associated with an average increase in technological innovation (LINNOV) ranging from 1.512% (column 6) to 1.887% (column 4), assuming all other factors remain constant. This validates the hypothesis (3) that implementing more stringent policies to reduce Table 8. impact of banking performances and environmental sustainability on technological innovation (iV-gMM results, Dep Var: LinnoV, for equation (7)). (1) (2) (3) (4) (5) (6) Variables Direct Roa Roe Bank_Z FsD MC LCo2 1.626*** 1.626*** 1.655*** 1.887*** 1.586*** 1.512*** (0.051) (0.051) (0.05) (0.055) (0.045) (0.067) BP −0.470*** −0.470*** −0.241 −0.360*** −0.245*** −0.459*** (0.082) (0.082) (0.160) (0.073) (0.052) (0.07) LgDPpc 0.629*** 0.629*** 0.600*** 0.798*** 0.445*** 0.620*** (0.054) (0.054) (0.06) (0.06) (0.051) (0.05) tD −0.023*** −0.0234*** −0.023*** −0.025*** −0.0165*** −0.0236*** (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) Roa −0.16*** (0.091) Roe −0.025 (0.012) Bank_Z −0.071*** (0.01) FsD 0.01*** (0.001) MC 0.01*** (0.004) Constant −18.51*** −18.51*** −18.34*** −22.34*** −17.14*** −17.53*** (1.008) (1.008) (1.056) (1.024) (0.894) (1.087) observations 229 229 229 229 229 229 R-squared 0.849 0.849 0.851 0.874 0.885 0.854 Year dummy Yes Yes Yes Yes Yes Yes Hansen test 0.0458 0.0458 0.0507 0.0432 0.0228 0.0195 F-statistic 64.27*** 64.27*** 59.94*** 81.19*** 87.64*** 78.12*** note. Robust standard errors in parentheses; the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. L = natural logarithm. source: authors computation using stata. 16 D. F. HORDOFA emissions has a significant and favorable effect on stimulating new innovation. The results indicate that when total bank assets (Bank_Z) increase by 1%, technological progress decreases by an average of 0.071%, assuming all other factors remain constant. Similarly, a 1% increase in the ratio of financial system deposits to GDP (FSD) leads to an average increase in innovation of about 0.01%, assuming all other factors remain constant. These statistics offer numerical information on how improvements in specific aspects of the banking sector’s strength can increase innovative efforts to develop environmental technologies, which supports hypothesis 4. Meanwhile, the control variables indicate that a 1% increase in GDP per capita results in an approximate 0.6–0.8% increase in technological innovation. Nevertheless, an increase of 1% in trade openness leads to a decrease in innovation of approximately 0.016–0.025% on average, while keeping other factors unchanged. The obtained results align closely with the predictions made by established theoretical frameworks. The control variables exhibited the expected behavior, with GDP showing a positive correlation and trade showing a negative correlation with innovation. The high R-squared values, inclusion of year dummies, and positive diagnostic test outcomes support the model specification and parameter reliability. In general, utilizing percentage change interpretations effectively communicates the extent of relationships between the key factors examined, as indicated by the empirical model results. An important contribution is the focused examination of these dynamics within G20 nations, which fills gaps in previous analyses that had a broader scope (Erdogan et al., 2023; Liu et al., 2021; Y. Sun et al., 2022; P. Zhang et al., 2023). The findings provide new empirical evidence that supports conceptual frameworks on the connections between financial systems, sustainable policies, and the outcomes of innovation. Results are used to evaluate the technological impact of sustainability and how banking activities can influence it in order to achieve important research goals. In summary, the empirical analysis provides valuable insights into the factors that contribute to progress toward common sustainability objectives among this influential group of major economies. The second aim of this study was to examine the relationship between banking sector performance, environmental sustainability, and technological innovation in G20 countries (Table 9). Table 9 presents the key findings from the IV-GMM technique. Columns (1) through (6) analyze the linear model, which is based on Equation (3). Columns (1) to (6) represent the performance indicators used by the banking sector, including BP (Banking Performance), ROA (Return on Assets), ROE (Return on Equity), Bank_Z, MC (Market Capitalization), and FSD (Financial Stability Indicator). Rows 3, 7, 9, 11, 13, and 15 present the results from interaction models derived from Equation (7). Furthermore, Equation (8) links the calculation of the ‘net effects’ shown in the bottom section of the table. The findings offer valuable insights into how different banking indicators moderate the connection between environmental sustainability and technological progress in G20 nations. We found the majority of interaction terms in the regression analysis to be statistically significant, supporting Hypothesis 3, which posits the presence of synergistic effects between these factors. When analyzing the performance of return on assets (ROA), the findings suggest that a 1% improvement in environmental sustainability results in a 3.321% decrease in average innovation levels, considering the influence of ROA. This complex interaction effect confirms theories about how contextual factors influence the relationship between sustainable policies and technological outcomes. A net effect of 5.44% indicates a significant positive impact of an increase in financial system deposits on the relationship between sustainability and innovation. This provides empirical evidence to support frameworks that highlight the importance of financial depth and inclusion in promoting innovative solutions. This study’s specific focus on the influential G20 bloc, as opposed to previous research that examined these dynamics more generally, highlights the significance of its findings (Akram et al., 2023; Azeem etal., 2022; Hafeez etal., 2022; Hussain etal., 2023). The findings provide specific insights for promoting coordinated progress towards common sustainability and development goals within this important policy-setting group. In general, measuring interaction patterns provides additional detail and empirical evidence to assess the hypothesized synergies between banking activities and their impact on environmental progress. The predominantly statistically significant results contribute to the validation of overarching theoretical frameworks that consider the combined effects of economic, policy, and innovation domains. Hypothesis 3 posited that the combination of banking sector performance and environmental sustainability would result in a mutually beneficial impact on the development of environmental COGENT BUSINESS & MANAGEMENT 17 technology innovation. The statistical analysis in Table 9 revealed that the majority of the interaction terms between the banking performance indicators (BP, ROA, Bank_Z, FSD, and MC) and environmental sustainability (LCO2) were found to be statistically significant. This study provides concrete evidence supporting Hypothesis 3, showing that banking activities play a crucial role in influencing the relationship between sustainability efforts and technological progress in a mutually beneficial way. Hypothesis 4 suggested that, when taking into account the performance of the banking sector, environmental sustainability would exert a net positive impact on environmental technology innovation. Table 9’s net effects calculations provide evidence in support of this hypothesis. We found that environmental sustainability positively influences levels of technological innovation after accounting for various aspects of banking system quality. The net effects range from 1.623% to 5.44%, depending on the specific conditions. This implies that implementing progressive policies can enhance innovative activities among G20 countries in addition to any financial assistance they may receive. Thus, the findings align with Hypothesis 4. To summarize, the significant interaction terms and positive net effects found in Table 9 confirm Hypotheses 3 and 4. This shows that banking supports the combined influence of sustainability and innovation and that sustainability has a positive impact on technology development, even when considering financial characteristics. In addition to the fourth objective, this study also sought to evaluate the overall impact of environmental sustainability on technology innovation, taking into consideration different aspects of banking sector performance. We considered the following six variables to achieve this goal: The study found that Table 9. impact of banking performances and environmental sustainability on technological innovation (iV-gMM results, Dep Var: LinnoV, for equation (8)). (1) (2) (3) (4) (5) (6) Variables BP_LCo2 Roa_LCo2 Roe_LCo2 Bank_Z_LCo2 FsD_LCo2 MC_LCo2 LCo2 1.581*** 1.979*** 1.797*** 2.351*** 1.338*** 1.652*** (0.047) (0.088) (0.107) (0.111) (0.116) (0.171) BP 4.698*** 4.698*** −0.394** −0.329*** −0.238*** −0.459*** (0.919) (0.919) (0.165) (0.052) (0.053) (0.069) LgDPpc 0.572*** 0.572*** 0.568*** 0.826*** 0.442*** 0.619*** (0.052) (0.052) (0.06) (0.055) (0.051) (0.053) tD −0.023*** −0.023*** −0.0216*** −0.0291*** −0.0129*** −0.024*** (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) Roa na Roa_LCo2 −0.415*** (0.077) BP_LCo2 −0.412*** (0.076) Roe 0.177 (0.108) Roe_LCo2 −0.015* (0.008) Bank_Z 0.303*** (0.07) Bank_Z_LCo2 −0.027*** (0.006) FsD −0.057* (0.033) FsD_LCo2 0.005** (0.003) MC 0.034 (0.036) MC_LCo2 −0.002 (0.003) Constant −17.37*** −17.37*** −20.09*** −28.58*** −13.90*** −19.30*** (0.878) (0.878) (1.453) (1.600) (1.644) (2.304) net effects 1.623% −3.321% −0.33% −3.191% 5.44% 0.12% observations 229 229 229 229 229 229 R-squared 0.872 0.872 0.856 0.885 0.886 0.855 Year dummy Yes Yes Yes Yes Yes Yes Hansen test 0.0319 0.0319 0.0068 0.0024 0.0472 0.0115 F-statistic 69.38*** 69.38*** 52.77*** 125.20*** 82.29*** 70.50*** note: Robust standard errors in parentheses. the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. L = natural logarithm. source: authors computation using stata. the mean values of the variables are: BP_LCo2 = -0.1016, Roa_LCo2 = 12.77, Roe_LCo2 = 141.75, Bank_Z _LCo2 = 205.24, FsD_ LCo2 = 819.61 and MC_LCo2 = 765.84. 18 D. F. HORDOFA environmental sustainability has a positive impact on technological innovation, as indicated by a 1.623% increase in the Banking Performance Index (BP). This aligns with the results of prior studies, which have consistently demonstrated a positive correlation between environmental sustainability and innovation (K. Chen et al., 2022; Saeed Meo & Karim, 2022; Shair et al., 2021; Udemba & Yalçıntaş, 2021) conducted an empirical study that examined the relationship between environmental sustainability and return on assets (ROA) and found a substantial adverse impact of -3.321% on technological innovation. This finding contradicts previous studies that emphasize the positive impact of integrating environmental sustainability into financial performance measures to promote innovation (Lee et al., 2016; Zakari et al., 2023). There are several potential factors that could explain this contradictory finding. First, the sample of G20 countries and timeframe studied here differ from previous work, introducing possibilities for divergent macroeconomic or policy influences on the association over time. Second, ROA may not adequately capture banking performance in all contexts, and its connection to innovation could depend on other industry or market conditions not fully accounted for (Saeed Meo & Karim, 2022; Yi, 2023). Third, the true nature of the interaction could be indirectly nonlinear rather than direct, varying based on banking system strength or technological maturity levels across countries. Fourth, relevant country-specific factors within the G20 that are difficult to measure, such as regulatory intensity or industry composition, may not be fully controlled for, biasing estimates if omitted from the analysis. Further nuanced empirical research is warranted to gain a deeper understanding and potentially reconcile differences between studies. Furthermore, the correlation between environmental sustainability and return on equity (ROE) led to a modestly favorable net impact of -0.33% on technological innovation. This discovery corroborates prior research that has similarly documented a favorable correlation between return on equity (ROE) and innovation (Klingenberg etal., 2013). Nevertheless, the effect size indicates that the connection between ROE and innovation is intricate and necessitates additional investigation. In addition, an analysis of banking stability (Bank_Z) revealed a significant negative correlation of -3.191% between environmental sustainability and technological innovation. This finding is consistent with prior research that has documented varying or inconsequential impacts of banking stability on innovation (Sharif et al., 2022). Therefore, the findings support the current body of research, suggesting that the stability of the banking sector may not have a substantial impact on technological innovation. Additionally, the correlation between environmental sustainability and financial soundness (FSD) led to a favorable overall impact of 5.44% on technological advancement. Ultimately, there was a slight but favorable correlation of -0.12% between environmental sustainability and market concentration (MC). This discovery is consistent with the ongoing dispute in prior literature concerning the influence of market concentration on innovation, which has produced inconclusive results (Lu & Chesbrough, 2022). Overall, this study successfully achieved its objective of examining the impact of environmental sustainability on technological innovation and different aspects of banking sector performance. This research seeks to enhance comprehension of these dynamics within a significant G20 context by empirically examining hypotheses aligned with the objectives. Upon reviewing relevant conceptual frameworks in the literature regarding the postulated relationships between banking, sustainability and innovation, one can contemplate how these dynamics may plausibly manifest within the influential G20 group of major economies. It is reasonable to hypothesize that higher performing banking systems within G20 nations would be better positioned to facilitate cutting-edge environmental technology solutions through increased access to financing. At the same time, more stringent sustainability policies and emission reduction targets adopted by G20 governments could stimulate valuable innovation as firms seek opportunities within newly emerging green markets. However, the relationships between these domains are likely multidirectional. Successful low-carbon innovations emerging from G20 countries may then motivate increased policy ambitions at the national level over time (Abbas etal., 2023; Hasan & Du, 2023). Meanwhile, forward-looking banks that proactively support pioneering innovators within their G20 markets could gain strategic and reputational advantages. There are complex interactive effects worth exploring empirically. Given the G20 bloc’s disproportionate global economic weight and leadership in both traditional industries and renewable sectors, unlocking synergies across financial, policy and R&D spheres within these contexts may yield invaluable lessons that ripple outward internationally. A focused analysis of postulated links among banking, COGENT BUSINESS & MANAGEMENT 19 sustainability and technological progress specifically within G20 settings could therefore provide compelling policy insights. Based on Equation (8), the net effects of environmental sustainability, taking into account banking sector performances, are as follows: 1.623%, -3.321%, -0.33%, -3.191%, 5.44%, and 0.12%. The explicit calculations for these net effects are as follows: ∂ ∂ = +− − () = LINNOV LCO21 581 0 412 0 106 1 623. ...* Bankingperformanceiindex () ∂ ∂ = +− () = − () LINNOV LCO21 979 0 415 12 77 3 321. .. .* ROA ∂ ∂ = +− () = − () LINNOV LCO21 797 0 015 141 75 0 33. ...* ROE ∂ ∂ = +− () = − () LINNOV LCO22 351 0 027 205 24 3 191 . ... _ * Bank Z ∂ ∂ = + () = () LINNOV LCO21 338 0 005 819 61 5 44. . ..* FSD ∂ ∂ = +− () = () LINNOV LCO21 652 0 002 765 84 0 12. . ..* MC 6.4. Endogeneity and robustness tests 6.4.1. Endogeneity test This study aims to examine the dynamics between banking sector performance, environmental sustainability, and environmental technology innovation in G20 countries. A core methodological consideration is addressing potential endogeneity biases inherent in models assessing these relationships. Endogeneity may arise due to simultaneity, as the banking performance measures, carbon emissions representing environmental sustainability, and environmental innovation outcomes could potentially influence each other concurrently. Omitted variable bias is also a concern if relevant drivers of the relationships are not fully accounted for. Measurement error poses challenges, as proxies like banking indexes and CO2 data may imperfectly capture the underlying theoretical constructs. Additionally, including lagged innovation levels to control for persistence correlates this prior dependent variable with the error term. To help address these endogeneity issues specific to the variables of interest, the system GMM estimator is adopted. It uses internal instruments in the form of suitably lagged banking performance, carbon emissions, and control variables to isolate exogenous variation impacting environmental technology innovation. A diagnostic test was examining the validity of the GMM instruments and model specifications. The empirical strategy aims to provide more robust estimates of the influence that banking sector, environmental conditions, and their interaction have on innovation outcomes according to this study’s objectives, while explicitly controlling for intricacies of endogenous relationships. The findings displayed in Table 10 contribute to the validation of the relationships investigated, taking into account concerns related to endogeneity. The study employed a rigorous methodology that addressed potential endogeneity biases by using the Lewbel (2012) instrumentation approach, and system GMM estimation. Diagnostic test results indicate the proper specification of SYS-GMM. The Arelleno Bond test shows first-order but not second-order autocorrelation in residuals. Moreover, the Hansen test validates the instrument selection. The regression accounts well for endogeneity based on diagnostic outcomes. Column (2) results indicate the estimated coefficient for agricultural socialized services remained positive. Arelleno Bond test results in column (1) show the AR(1) p value is 0.018, below the 5% significance 20 D. F. HORDOFA level, while the AR(2) p value is 0.942, above the 10% level. This suggests only first-order autocorrelation, with no second-order or higher autocorrelation in the residuals. Moreover, the Hansen test p value exceeds 0.1, validating the instrument selection. Regression results remained reliable after accounting for endogeneity. AR(1), AR(2) and Hansen test outcomes confirm valid instruments with no significant over fitting. Notably, the coefficients remained consistently similar across the different specifications, which increased confidence in the identified patterns. This alignment reinforces previous research that has used various methods to address endogeneity, providing additional support for the credibility of the observed effects (Z. Chen et al., 2022). In addition, diagnostic tests provided reassuring verification of accurate moment conditions and ruled out any instruments. When analyzed in conjunction with wider empirical validation, the study offers strong evidence that its findings are based on genuine cause-and-effect determinations rather than coincidental connections. The stability of outcomes in the presence of endogeneity challenges is somewhat consistent with the mixed findings reported in previous studies (Liu etal., 2021). In conclusion, by rigorously addressing endogeneity using tested econometric tools, the study provides compelling evidence for the connections between banking, sustainability, and innovation goals among G20 countries. Overall, the rigor of SYS-GMM, alongside other models used, provides a robust estimation of the influence that banking sector performance, environmental conditions, and their interaction have on environmental innovation in G20 countries according to the study objectives. While limitations exist, best practices are followed to yield reliable results on the complex dynamics between financial, sustainability, and technology dimensions. 6.4.2. Robustness tests This study employed cross-sectional time-series fully modified generalized least squares regression to conduct a robustness analysis. Table 11 demonstrates that the FGLS specification supports the relationships found in previous models. More precisely, there was a consistent and strong positive relationship between environmental sustainability and innovation in all areas, which aligns with the underlying theories and previous research. The majority of banking performance metrics once again confirmed the initial hypotheses, as BP, Bank_Z, and MC consistently showed small negative effects that were in line with previous findings. Financial deepening through financial system deposited (FSD) has been identified as a significant factor in driving progress, which complements frameworks that focus on inclusion. The control factors exhibited the anticipated behavior, thereby providing further validation for the construction of the model. In addition, the diagnostics revealed that the FGLS approach effectively dealt with the issues of heteroskedasticity and autocorrelation that are inherent in panel data. Interestingly, even when Table 10. endogeneity test with Lewbel (2012) and system gMM. (1) (2) Variables Lewbel (2012) sYs-gMM L.LinnoV 0.795*** (0.0954) LCo2 1.348*** 0.486 (0.0823) (0.300) BP −0.575*** −0.0289 (0.0895) (0.0170) LgDPpc 0.592*** −0.0128 (0.0509) (0.281) tD −0.0248*** 0.00298** (0.00402) (0.00125) Constant −13.63*** −4.676* (1.276) (2.544) observations 249 245 R-squared 0.800 number of c_id 22 Country Fe Yes Control variable Yes aR (1) 0.018 aR (2) 0.942 Hansen test 0.640 F-statistic 820.25*** note: standard errors in parentheses; the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. COGENT BUSINESS & MANAGEMENT 21 using a different method to address statistical problems, the results were consistent with the initial models and existing research. This concordance increases certainty in conclusions by ensuring that they accurately represent genuine connections rather than being influenced by estimation errors. The findings, along with previous evidence, provide compelling empirical support for the relationships studied among G20 countries. Using FGLS regression as an additional robustness test enhances the strength and dependability of inferences made about important dynamics. 7. Summary and conclusion This study presents new empirical findings on the connections between environmental sustainability, banking performance, and technological innovation in G20 countries. The findings of this study provide valuable insights that are relevant to and expand upon the current body of research. Through the application of panel methods, a thorough analysis of direct, interactive, and net effects was conducted, leading to the identification of several significant findings that have both theoretical and practical implications. The findings provide a valuable understanding of the patterns of innovation in G20 nations. Technological progress consistently showed a strong positive correlation with carbon emissions across all models. However, when examining specific banking metrics, it was discovered that certain nuances emerged. For example, bank risk scores deviated from the typical negative correlation with overall performance. The majority of interaction effects were consistent with the impacts of carbon, although returns influenced relationships in a different manner. Examining the impacts from various perspectives provided distinct viewpoints on banking. The findings validate that sustainability consistently enhances innovation in a direct manner. However, when examining disaggregated banking indicators, it becomes apparent that there are influences that go beyond the overall indexing. Introducing interactions occasionally reverses previous index links. Examining the beneficial effects of sustainability on innovation, particularly in relation to financial considerations, has further emphasized its role as a catalyst. As researchers focused on issues pertaining to finance, policy and innovation, this study examining linkages within G20 contexts makes an important contribution towards supporting sustainable development goals. Upon reviewing the empirical findings, a few recommendations emerge for strengthening integrated progress in these spheres going forward. Examining the beneficial effects of sustainability on innovation, particularly in relation to financial considerations, has further emphasized its role as a catalyst. Policies within G20 nations that encouraged reductions in emissions, such as mandatory sustainability reporting and targets, had a significant impact in driving innovative solutions, according to this study’s findings. Table 11. Robustness analysis using cross-sectional time-series FgLs regression (Dep.var: LinnoV). (1) (2) (3) (4) (5) (6) Variables LinnoV LinnoV LinnoV LinnoV LinnoV LinnoV BP −0.03 −0.03 −0.03 −0.03 −0.015 −0.03 (0.02) (0.02) (0.039) (0.021) (0.017) (0.018) LCo2 1.742*** 1.742*** 1.757*** 1.736*** 1.551*** 1.684*** (0.06) (0.06) (0.052) (0.06) (0.08) (0.07) LgDPpc 0.655*** 0.655*** 0.660*** 0.656*** 0.604*** 0.642*** (0.05) (0.05) (0.05) (0.05) (0.07) (0.06) tD −0.008*** −0.008*** −0.009*** −0.007*** −0.003 −0.06** (0.004) (0.002) (0.003) (0.003) (0.002) (0.002) o.Boa na Boe −0.0001 (0.004) Bank_Z −0.003 (0.006) FsD 0.005*** (0.001) MC 0.001 (0.002) Constant −20.40*** −20.40*** −20.61*** −20.33*** −17.78*** −19.59*** (0.942) (0.942) (0.891) (1.000) (1.157) (1.066) observations 249 249 249 249 249 249 number of c_id 22 22 22 22 22 22 note: standard errors in parentheses. the asterisks indicate the level of statistical significance, with three asterisks (***), two asterisks (**), and one asterisk (*) denoting p values less than 0.01, 0.05, and 0.1, respectively. 22 D. F. HORDOFA Its evident cooperation across sectors is vital yet complex dynamics remain in need of unpacking. Pilot collaborations targeting challenges within individual G20 nations may help untangle context-specific relationships. Lessons learned from collaborating on place-based sustainability transitions could then inform broader multi-stakeholder partnerships. Policymakers should pursue a comprehensive, multidimensional approach when crafting regulations. Rules should aim to promote customized and inclusive green financing systems through initiatives like expanding dedicated lending programs, innovation hubs supporting SMEs, and prudent market oversight. Mainstreaming sustainability criteria within bank governance and lending practices may strengthen incentives for innovative solutions while boosting long-term financial performance long-term. Gradual implementation should balance risks with opportunities. Learning exchanges between pioneers and lagging G20 members could help surmount barriers. Businesses can gain competitive advantages by actively involving stakeholders to identify opportunities associated with sustainability. Cross-industry collaborations also enhance the exchange of new ideas. Overall, the findings point towards untapped potential if G20-scale thinking shifts towards integrated innovation development, finance networks, and strategic collaborations. With research insights, these economies can pioneer sustainable systems change through targeted policy experiments and multi-stakeholder partnerships. Despite the limitations of this study, such as data and time period constraints, measurement challenges, and inability to fully address endogeneity, the findings provide valuable policy guidance for maximizing cooperation between sustainability and economic goals. The ongoing analysis, which focuses on specific G20 contexts, is advanced through collaboration between researchers and policymakers. This collaboration leads to practical actions that address shared real-world priorities. However, there is still room for improvement. Future research directions include conducting qualitative case studies within G20 nations to help disentangle complex issue dynamics. As more longitudinal data becomes available, expanding the scope and timeframes analyzed may reveal additional intricacies in the relationships over time. Alternative econometric techniques could also better address endogeneity and potential nonlinear influences. Incorporating industry-level or local data could expose conditionally distinct patterns. Surveys and interviews augmenting statistical analyses with qualitative inputs may further enhance understanding. Comparative analyses involving both G20 and non-G20 samples have the potential to shed light on whether sustainability-economy linkages vary by development level. Continuous collaborative efforts enhancing knowledgeable discussions between evidence and practice are important given the pressing need to expedite transformations within impactful G20 contexts. Acknowledgements The author is responsible for any errors or omissions in the paper. Authors’ contributions DFH conducted all aspects of the study, including study design, data collection, analysis, and manuscript preparation. DFH also reviewed and approved the final manuscript. Availability of data and materials Upon request, the data and materials will be made available. Disclosure statement The author states that there are no competing interests to declare. About the author Dereje Fedasa Hordofa is a lecturer and researcher at Dire Dawa University in Ethiopia. He holds an MSc in Development Economics from Ambo University and a BA in Economics from Wolkite University. He is a full member of the Ethiopian Economic Association. His research interests include income inequality, financial development, COGENT BUSINESS & MANAGEMENT 23 development economics, and bank performance. Dereje has published six high-impact papers in peer-reviewed journals such as Cogent Business & Management (Taylor & France), Heliyon, and Research in Globalization (Elsevier), Environment, Development and Sustainability, and Discover Global Society (Springer). Two papers explored the relationship between board diversity, structure, and bank performance in Ethiopia. One examined economic growth drivers. Two others investigated income inequality’s moderating role on women’s economic empowerment and the multidimensional impacts of globalization on economic growth. His extensive empirical work demonstrates expertise in banking, macroeconomics, and development domains. 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