Evaluating the impact of climate risk on financial access and stability in G20 countries : a panel data approach (2006-2017)

Abstract

The burgeoning international concern over environmental sustainability has brought to the forefront the unique challenges climate change poses to global economies and financial markets. In the light of this, the role of International Financial Institutions like the International Monetary Fund and the World Bank in transitioning towards a green economy is increasingly critical. This study aims to elucidate the influence of climate risk on financial access and stability within G20 countries, spanning from 2006 to 2017. Employing a comprehensive panel data analysis, which accounts for cross-sectional dependence and slope heterogeneity, a fixed effects model is utilized. The Global Climate Risk Index (CRI) scores, provided by Germanwatch, serve as the primary measure of climate risk, with lower scores indicating heightened risk. The investigation reveals a non-linear relationship, where enhanced financial access correlates with diminishing climate risk, underscoring the positive impact of climate change policies on financial system efficiency. However, no significant connection is found between climate risk and financial fragility, a phenomenon potentially attributed to the resilience of countries with advanced credit markets and preemptive risk insurance measures by households. These findings imply that while climate change significantly influences financial access in G20 countries, its effect on financial fragility within the studied period is negligible. The study underscores the potential for policy interventions in climate change mitigation to augment financial system efficiency. Ensuring the consistency of professional terminology, the analysis provides insights into the nuanced relationship between climate risk and financial dynamics in major economies.