Does climate change affect the financial stability of Sub-Saharan African countries?

This study examined how climate change impacts the financial stability of Sub-Saharan Africa (SSA) using panel data spanning from 2010 to 2018. Using the System Generalized Method of Moments (SGMM), the study revealed that climate change exerts a significant negative effect on the financial stability of SSA both in the short and long-run. Specifically, compared to negative shock, a positive shock to mean temperature would cause a significant negative adjustment to the financial stability both in the short- and long-run. Moreover, the results showed that climate change poses a greater threat to financial stability in the long-run compared to the short-term. The standardized precipitation index also has a significant positive impact on financial stability in the long-run. Thus, governments and financial regulators in SSA should address climate-induced financial risks, particularly physical risks, through consistent and congruent climate policy responses. Central banks should integrate climate risks into their core policy and regulatory frameworks using climate-risk assessment tools like stress tests, mandating firms across sectors to disclose minimum climate-related information, and offering incentives for green investments with clear eligibility criteria to bridge the climate funding gap and proactively mitigate climate risks.