Abstract
Aim/purpose – Given the growing global recognition that climate change, natural hazards, and environmental issues can lead to adverse effects on the financial sector, the paper subscribes to the research field of climate-related financial monitoring frameworks. It aims to empirically investigate the interplay between climate-related factors and major banking soundness (prudential) indicators.
Design/methodology/approach – A panel regression framework is used to model and validate the influence exerted by various climate-related drivers on a range of core banking system indicators. A series of baseline models is tested for a pool of 27 European Union countries over a two-decade period (2000-2021).
Findings – The most frequent relationships of determination are established between transition risk proxies and banking indicators, with the net greenhouse gas emissions showing the most persistent influence. From the standpoint of core banking indicators, those that account for financial performance exhibit a higher propensity to be influenced by climate-related risks, compared with those that account for strategic or operational performance. More in detail, banking solvency appears to be sensitive to all four climate risk metrics included in the model specification; the same conclusion holds for banks’ ability for revenue diversification as a strategic performance indicator.
Research implications/limitations – The research has implications for financial intermediaries, banking regulators, and supervisory authorities as it fits with the broader, challenging framework related to climate risk management. The comprehensive identification, measurement, and monitoring of various climate-risk dimensions have become a significant focus for decision-makers, given their potential to catalyze adverse systemic events in the financial market. An objective limit of the research relates to the still underdeveloped metrics associated with climate challenges and the lack of ample longitudinal datasets, which restricts the sample size.
Originality/value/contribution – The research advances knowledge of the intricate relationship between climate-related indicators and core banking indicators that account for financial, operational, and strategic performance. In particular, a granular taxonomy of climate risks is employed, by delineating between physical risks (further classified into acute and chronic events) and transition risks.