Sub-Saharan Africa Needs Climate Finance, But Not at The Expense of Financial Stability.
At COP30 in Belém, Brazil, countries agreed to mobilize at least $1.3 trillion per year by 2035 for climate action and to triple adaptation finance to $120 billion. Like the COP29 climate finance pledge of $1.9 trillion in 2023, this is ambitious. Yet, the fine print reveals a troubling pattern: 71% of current climate finance flows as loans rather than grants, adding to debt burdens in countries already spending more on interest payments than on healthcare or education. For Sub-Saharan Africa (SSA), this creates a paradox; one that recognizes the need for the region to finance resilience building, and another that recognizes that the structure of that financing could destabilize already fragile financial systems.

The region confronts a dual challenge. SSA requires an estimated $2.8 trillion between 2020 and 2030 to implement its climate commitments, yet it received only $30 billion in 2023, a staggering 88% shortfall. Moreover, the International Monetary Fund (IMF) reports that across SSA, there are voids in risk-based financial supervision, weak prudential oversight, limited regulatory capacity, and scarce supervisory resources. Even more concerning is that across the region, financial regulators often lack the tools to assess climate-related credit, liquidity, and operational risks, while underdeveloped bond markets further constrain climate finance, all of which have contributed to debt averaging 58% of GDP, the highest level in two decades. With these existing challenges, SSA needs climate finance, but not at the expense of financial stability.

1. Financial Fragility in the Shadows
The Climate Policy Initiative report of 2024 revealed that many African financial systems are ill-prepared to absorb large-scale climate investments. Banks often hold concentrated portfolios, limiting their capacity to lend to high-risk green projects. Insurance markets remain underdeveloped, constraining hedging against climate-related losses. Supervisory agencies operate with limited staff, technical expertise, and risk-assessment tools. Between 2014 and 2018, less than half of the committed adaptation funds to African countries were disbursed, which means that this is not a funding gap challenge, but a structural capacity challenge in managing climate finance flows.

The consequences of poor financial risk management are not theoretical. In November 2020, Zambia became the first African country to default on its sovereign debt during the COVID-19 pandemic, a crisis stemming from years of unsustainable infrastructure borrowing. Government bonds represented 30% of Zambia's banking sector income, so when bond values collapsed, banks' balance sheets were severely affected, creating financial stability risks. Although Zambia's default was not caused by climate finance, it shows how poorly managed debt, whatever its purpose, can cascade through an entire financial system.

Now, let us imagine similar dynamics playing out with climate finance. Deploying billions in loans for renewable energy or adaptation projects without adequate risk assessment capacity could create three key vulnerabilities:

i.Credit and operational risk: Banks may extend loans to green projects without adequate due diligence, leaving them exposed to defaults. Financial institutions prioritize "bankable" projects with guaranteed returns and minimal risk, but vulnerable communities lack the collateral and regulatory certainty these institutions demand, creating pressure to approve projects that do not meet proper standards.

ii. Liquidity stress: Large inflows of climate funding, especially short-term or project-specific, can create mismatches between available capital and financial obligations. When projects take longer than expected to generate returns, banks face liquidity challenges.

iii. Market distortions and debt vulnerabilities: Instruments such as blended finance, debt-for-climate swaps, or concessional loans can misallocate resources, exacerbate debt stress, or undermine market discipline if regulators cannot monitor them effectively.
For example, blended finance, often used by development finance institutions, leverages private capital for climate projects. Yet, a poorly designed blended finance structure may shift undue risk onto local banks that lack the expertise to price this risk appropriately. Similarly, carbon-market revenues or green-bond issuances without adequate disclosure rules may create false signals of project viability or creditworthiness.

2. Climate Urgency Argument
There are plethora of evidence that supports the mobilization of finance for climate action in SSA and across the world, given the urgency of climate threats. The Independent High-Level Expert Group on Climate Finance warns that "any shortfall in investment before 2030 will place added pressure on the years that follow. Therefore, waiting for perfect regulatory capacity will cost more in climate damage than in potential financial instability. This urgency is real, but the tripling of adaptation finance to $120 billion by 2035 agreed at COP30, still falls short of the estimated $400 billion annually that developing countries need by that date. Communities across Africa face escalating climate impacts now, not in a decade.
In light of the experience of rapid financial sector expansion in other contexts, the costs of instability can be severe and long-lasting, which will lead to a steeper and potentially more costly path to climate stability. " For example, in a renewable energy project, a sovereign default triggered by poorly structured capital could impact adaptation projects and exacerbate inequality, setting back climate goals by years. The solution is not to choose between climate action and financial stability, but to integrate them from the outset.

3. Pathways for scaling climate finance The solution is not to slow the flow of climate finance. On the contrary, scaling finance is essential for the region's sustainable development. The solution lies in building financial stability safeguards into climate-finance design and supervision. Policymakers and regulators should adopt these complementary strategies:

i. Strengthen prudential frameworks: It is important to integrate climate-related financial risks into regulatory capital requirements, risk-weighted lending guidelines, and internal risk-management expectations for banks and insurers. This means moving beyond generic risk categories to develop climate-specific stress indicators relevant to African contexts, such as drought impacts on agricultural loan portfolios or flood risks to coastal infrastructure investments.

ii. Enhance disclosure regimes: Mandate clear reporting of climate-related exposures for financial institutions, making risks visible to regulators, investors, and counterparties. Transparency is particularly critical in markets where information asymmetries already hamper efficient capital allocation.

iii. Conduct climate stress tests: Adapt stress-testing methodologies to local markets, assessing the impacts of physical and transition risks on bank solvency, liquidity, and market stability. The Network for Greening the Financial System (NGFS) has developed scenario frameworks that supervisors can adapt to assess climate-related vulnerabilities in their jurisdictions.

iv. Align incentives with local capacity: Coordinate across finance ministries, central banks, and development finance institutions to ensure climate-finance instruments are feasible, fiscally sustainable, and risk-sensitive. This requires an honest assessment of institutional capacity and willingness to build that capacity as part of climate finance deployment, not as an afterthought.

4. Building on Existing Foundations African regulators are not starting from zero. The NGFS, now encompassing 144 central banks and supervisors globally, including several from Africa, provides technical guidance and scenario analysis tools. The National Bank of Rwanda co-leads the NGFS Task Force on Adaptation, ensuring African perspectives shape global climate finance frameworks.
However, the real challenge is implementing these tools in environments with limited technical capacity, legal frameworks, and institutional coordination. This requires targeted support: training programs for supervisory staff, technical assistance in developing climate risk taxonomies relevant to African economies, and systems to monitor cross-border climate finance flows that might create systemic risks.

5. Concrete Steps Forward
The World Bank, African Development Bank, and bilateral donors should integrate financial stability assessments into all major climate finance approvals as they work to implement the Baku to Belém Finance Roadmap, the pathway designed to scale finance from public and private sources to meet the new $1.3 trillion goal. Before deploying large climate finance packages, these institutions should evaluate:

• Whether recipient countries have adequate supervisory capacity to monitor climate-related financial risks

• Whether local banks have sufficient capital buffers and risk-management systems

• Whether climate finance flows are structured to avoid creating debt vulnerabilities

Additionally, development partners should condition large climate finance flows on demonstrable progress in building supervisory capacity. This does not mean withholding urgent climate finance, it means pairing finance with technical assistance to ensure it can be absorbed safely.

6. Why Financial Stability Matters for Climate Action
Addressing this challenge is not just a technical exercise; it is a development imperative. Financial instability can quickly erode the very resilience climate finance seeks to build. Conversely, a stable, climate-aligned financial system can unlock private capital, enhance energy independence, and accelerate a low-carbon transition.

Further, SSA must scale climate finance, but with prudence. Policymakers, regulators, and development partners should treat financial stability as a precondition for climate action, not an afterthought. By doing so, the region can mobilize the capital it needs while safeguarding its financial foundations.

Climate finance offers the promise of resilience, growth, and sustainable development. But this promise will be realized only if regulators, policymakers, and financiers work together to deploy capital safely, strategically, and sustainably. The cost of ignoring financial stability is high; a climate-driven financial crisis would be a setback Africa cannot afford.

SSA needs climate finance, but not at the expense of financial stability. A resilient financial system is not a barrier to climate action; it is its foundation.