Navigating Climate-Driven Financial Risks: The Strategic Role of Green Finance in Shaping a Sustainable Global Economy

Abstract

Climate change poses unprecedented systemic risks to the global financial system, potentially affecting economic stability, investment forecasts, particularly the solvency of financial institutions. Green finance has served as a strategic catalyst, effectively mobilizing funding for initiatives that provide environmental advantages while facilitating the transition to a low-carbon, sustainable economy. This study examines the role of green finance in mitigating climate-related financial risks and in establishing a resilient financial system. This study used a qualitative, secondary research methodology to compile information regarding the effectiveness of green financial instruments, including as green bonds, sustainability-linked loans, and ESG integration, in mitigating physical, transition, and systemic risks. Empirical findings indicate that, in contrast to conventional investment, green financing enhances financial performance and asset quality while minimizing default risks. However, significant obstacles persist, including regulatory stockpiling, conflicting ESG criteria, greenwashing, and data deficiencies, which hinder its scale and credibility. The research underscores the importance of robust policy frameworks, including the EU Taxonomy and national green financing plans, in enhancing transparency and cross-sectoral coherence. Policy recommendations include the harmonization of standards, establishment of green banks, integrating financial instruments, promotion of technology-driven solutions, enhancement of adaption finance, and development of institutional capacity. A principal conclusion of the study is that the integration of green finance necessitates coordinated efforts by policymakers, financial institutions, and stakeholders to tackle institutional and market obstacles, ensuring that growth is both equitable and resilient to climate change.

Keywords: green finance, climate risk, sustainable economy, financial instruments, policy frameworks.

DOI: 10.7176/JESD/16-5-03

Publication date: July 30th 2025