Review Article
Green Finance, Innovation, and Financial Stability: Assessing the Role of Sustainable Investment in South Africa’s Transition Economy
Issue:
Volume 12, Issue 5, October 2026
Pages:
105-114
Received:
16 June 2026
Accepted:
1 July 2026
Published:
12 November 2026
Abstract: This study empirically examines the dynamic relationship between green finance, financial innovation, exchange rate volatility, and macro-financial stability in South Africa’s transition economy. Using quarterly time-series data spanning 2000Q1-2025Q4, we construct a multivariate framework incorporating green bond issuance and ESG-linked capital flows (green finance proxy), a composite financial stress index and banking sector Z-score (financial stability proxies), digital financial innovation indicators, the real effective exchange rate, GDP growth, and the policy repo rate. After confirming non-stationarity at levels using Augmented Dickey-Fuller and Phillips-Perron tests, Johansen cointegration tests reveal a long-run equilibrium relationship among the variables, justifying estimation through a Vector Error Correction Model (VECM). Impulse Response Functions indicate that a one-standard-deviation shock to green finance reduces financial stress by approximately 0.28 standard deviations within four quarters (p < 0.05), while improving banking sector resilience as measured by the Z-score. However, exchange rate depreciation offsets nearly 20% of the stabilising effect, highlighting the role of currency risk in transition financing. Variance decomposition analysis shows that green finance innovations explain 17-22% of forecast error variance in financial stability over a 10-quarter horizon, confirming its growing systemic relevance. The moderating effect of financial innovation is statistically significant (p < 0.05), strengthening the transmission of sustainable capital toward macro-financial resilience. These findings suggest that green finance can enhance systemic stability in a carbon-intensive emerging market; however, its effectiveness depends on exchange-rate management and institutional quality. Policy implications therefore require cautious integration of climate-related financial instruments into macroprudential frameworks to mitigate unintended liquidity and currency spillovers during the Just Energy Transition.
Abstract: This study empirically examines the dynamic relationship between green finance, financial innovation, exchange rate volatility, and macro-financial stability in South Africa’s transition economy. Using quarterly time-series data spanning 2000Q1-2025Q4, we construct a multivariate framework incorporating green bond issuance and ESG-linked capital fl...
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,
Linda Paul
