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Climate resilience through finance: The divergent roles of institutions and markets

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  • Rao, Amar
  • Kumar, Satish

Abstract

This study investigates the divergent roles of financial institutions and financial markets in shaping climate resilience, with a focus on lower- and middle-income countries. Using a panel dataset spanning 1996–2021, we employ fixed effects models with Driscoll–Kraay standard errors and instrumental variable (IV-2SLS) techniques to address cross-sectional dependence, heteroskedasticity, and endogeneity. Our findings reveal that well-developed financial institutions, such as commercial and development banks, have a consistently positive and significant impact on climate resilience, especially when supported by strong governance frameworks. Interaction effects show that governance quality, particularly regulatory quality and control of corruption, significantly amplifies the effectiveness of financial institutions. Conversely, the role of financial markets appears more complex and context-dependent: in the absence of robust governance, financial markets can exhibit negative or neutral effects on resilience outcomes. These results underscore the importance of institutional quality in determining whether financial development supports or hinders climate adaptation. The study offers actionable insights for policymakers seeking to leverage finance for climate-resilient development in emerging economies.

Suggested Citation

  • Rao, Amar & Kumar, Satish, 2025. "Climate resilience through finance: The divergent roles of institutions and markets," Finance Research Letters, Elsevier, vol. 85(PC).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325012668
    DOI: 10.1016/j.frl.2025.108008
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    2. Silva, Thiago Christiano & Wilhelm, Paulo Victor Berri & Guerra, Solange Maria & Tabak, Benjamin Miranda, 2025. "Extreme weather and firm borrowing: Evidence from Brazil," Finance Research Letters, Elsevier, vol. 86(PG).

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    Keywords

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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