Climate Risk and Financial Markets: Comparative Evidence from African and Developed Economies

Abstract

This study examines the relationship between climate risk and sovereign financial-market outcomes across African and
developed economies during the period 2010–2024. Anchored on an integrated climate-risk pricing framework, the study
investigates whether climate vulnerability influences sovereign borrowing costs and whether climate finance and climate-related
regulatory integration mitigate adverse market perceptions. Using a panel dataset comprising 25 countries and employing fixed
effects, interaction-effects, and dynamic System-Generalized Method of Moments (System-GMM) estimations, the analysis
evaluates the direct and moderating channels through which climate risk affects sovereign debt-market performance. The findings
reveal that climate vulnerability significantly increases sovereign bond spreads, indicating that financial markets increasingly price
climate-related risks into sovereign credit assessments. In contrast, climate-finance inflows and regulatory climate integration are
associated with lower sovereign borrowing costs, suggesting that adaptation financing and climate-governance frameworks
strengthen investor confidence and enhance macro-financial resilience. The results further demonstrate that climate risks are priced
considerably more aggressively in African economies than in developed countries, reflecting differences in institutional capacity,
fiscal flexibility, financial-market depth, and adaptive readiness. Dynamic panel estimates confirm the persistence of these
relationships after controlling for endogeneity and sovereign-risk inertia. The study contributes to the emerging literature by
extending climate-risk pricing beyond corporate and equity markets to sovereign debt markets and by providing comparative
evidence across economies at different stages of development. The findings underscore the importance of strengthening climate
resilience, expanding access to climate finance, and deepening regulatory climate integration as mechanisms for improving
sovereign creditworthiness and promoting long-term financial stability.