Climate laws and financial stability

Abstract

We examine the impact of climate laws on financial stability, addressing a key but underexplored aspect of financial regulation. As climate risks intensify, climate laws variously mandate that financial institutions, markets and regulators integrate climate risk considerations into their stability frameworks. Using panel data from 92 countries during 2013–2020 and employing fixed-effects regression, instrumental variable estimation, and propensity score matching, the analysis finds that stronger climate law implementation enhances financial stability by reducing systemic risks, credit defaults, and market distortions. However, the effectiveness of climate regulations varies based on the nature of regulations, institutional strength, financial market depth, and enforcement mechanisms. The findings contribute to the growing discourse on climate-aligned financial regulation, providing empirical evidence on how climate laws function as macroprudential tools. This study offers policy-relevant insights for regulators, central banks, and financial institutions, emphasizing the need for comprehensive enforcement strategies to maximize the financial stability benefits of climate policies.

Keywords: Climate laws, Climate risk management, Financial stability, Macroeconomic regulation, Sustainable finance, Systemic risk.