Exploring the interconnections between climate-green bond financing, sustainable environment and financial markets in Sub-Saharan Africa

Abstract

This study explores the relationship between climate finance, green bonds, environmental sustainability, institutional quality, and financial market development in Sub-Saharan Africa from 1995 to 2023. Financial market outcomes are assessed through access, depth, efficiency, and stability, while green finance is represented by green bond issuance, bank loan carbon footprints, and environmental protection expenditure. Climate finance is measured by inflows of climate related funds, with the Environmental Performance Index (EPI) serving as a proxy for sustainability. The System Generalized Method of Moments is employed as the baseline estimator, with Fully Modified Ordinary Least Squares and Dynamic Ordinary Least Squares providing robustness checks. The results demonstrate that climate finance, green bonds, and environmental sustainability exert significant positive effects on financial market development in the long run, although persistent exchange rate shocks remain a challenge. The interaction analysis underscores the importance of governance. Institutional quality magnifies the effects of environmental expenditure, enhancing depth, efficiency, and stability. Further, interactions with specific green financial instruments reveal differentiated outcomes. The combination of EPI and green bonds improves access and efficiency, while EPI with environmental protection expenditure increases access and efficiency but shows limited impact on stability. EPI with carbon footprints strengthens depth, efficiency, and stability, whereas EPI with climate finance flows enhances access, depth, and efficiency. The findings suggest that integrating environmental protection with green and climate finance, supported by strong institutions, can foster more resilient, efficient, and sustainable financial markets in Sub-Saharan Africa.