Green finance under fire: Navigating financial and geopolitical risk through climate adaptation strategies

• Enhanced climate resilience, proxied by the ND-GAIN index and its readiness subcomponent, significantly reduces geopolitical risk. • Climate resilience, while beneficial for political stability, may challenge financial stability by reducing liquidity and increasing non-performing loans. • Geopolitical risk negatively affects liquidity, with indirect effects on credit risk. This study investigates the intricate interdependence between climate resilience, geopolitical risk, and financial stability in low- and middle-income countries (LMICs). Using a simultaneous equations model with three-stage least squares estimation, we analyze panel data from 128 LMICs spanning 1980 to 2024. Our findings reveal that enhanced climate resilience – proxied by the ND-GAIN index and its readiness subcomponent significantly mitigates geopolitical risk, underscoring the role of institutional preparedness in reducing political instability. Furthermore, climate resilience is shown to challenge financial stability by reducing liquidity and by increasing non-performing loans, while climate vulnerability exerts mixed effects. Notably, geopolitical risk negatively affects liquidity but has a less consistent impact on credit risk, indicating indirect transmission mechanisms. These results highlight the importance of integrated policy frameworks that enhance climate adaptation and financial robustness to buffer LMICs against escalating geopolitical and environmental shocks. The study offers empirical support for the implementation of climate-related policies as tools to foster macro-financial stability and sustainable development.