Green finance, climate risk and financial stability: Evidence from ASEAN+4 countries

Abstract

This research investigates the impact of green finance on financial stability and its moderating role in mitigating the adverse effects of climate risk on bank stability. The study uses data pertaining to green finance development and government involvement in the ASEAN+4 countries and territories from 2016 to 2023. The study used fixed-effects, quantile regression, system generalized method of moments (SGMM), and method of moments for quantile regression (MMQR) and yielded several key findings. First, green finance development enhances financial stability in countries with low financial stability but has a limited effect in economies with high financial stability. Second, government involvement in green finance contributes to financial stability across all ASEAN+4 countries and territories. Third, green finance helps reduce the negative impact of climate risk on financial stability. These findings highlight the crucial role of green finance in promoting financial resilience, particularly in the face of climate-related risks. Policymakers need to have specific policies that are appropriate to each country's level of financial stability to maintain financial stability and control the impact of climate change.