Do good intentions bring bad results? Climate finance and economic risks

•Climate finance has emerged as an important solution for helping developing countries combat climate change, but the adverse effects cannot be overlooked.•Climate finance aggravates the economic risks, and the impact of mitigation finance seems more remarkable than adaptation finance.•Climate finance received by SIDS has fewer adverse effects on economic risk.•The negative influence of adaptation finance appears to be less notable in countries with higher political stability and less violence. Climate finance has emerged as an important solution for helping developing countries combat climate change. However, its potential adverse effects on the development of recipient countries remain unclear. This study analyzes multilateral climate finance flows from 2000 to 2018 to assess whether climate finance has an adverse impact on economic risks. The results indicate that climate finance significantly aggravates the economic risks, in which mitigation finance induces more economic risk than adaptation finance. The adverse effects are less notable in countries with higher political stability, indicating that stable political environment is essential in the use of climate finance.