Assessment of the Relationship among Climate Change, Green Finance and Financial Stability: Evidence from Emerging and Developed Markets

Abstract

This study assesses the relationship among climate change, green finance, and financial stability annually from 2013 up to 2021 for 14 countries, focusing on emerging and developed markets. It first considers whether a country’s climate change impact financial stability, investigates whether green finance influences financial stability and how it affects climate change by using carbon dioxide emissions as proxy of climate change. Green finance has been measured by green of asset backed securities, green loans and bonds, while financial stability has been measured by Z-score. Using panel data, the findings indicate that there is a significantly negative effect of CO2 emissions on financial stability, but positive effects of green finance on financial stability in these markets, most notably through green loans. Also, this paper examines the relationship between green finance and climate change by using Kao Residual Cointegration test of countries. In the long run, green finance negatively affects carbon dioxide emissions. Furthermore, the empirical results of the robustness test of GMM are highly consistent with the main test. This study may be extended by conducting Further research to focus on the effect of CO2 emissions on financial markets with the role of financial deepening for countries.