The impact of banks’ climate engagement on systemic risk. Does committing a little or a lot make a difference?

Abstract

We investigate the relationship between climate change commitment and systemic risk using a sample of 211 international banks over the period 2011–2020. We hypothesize that banks that are more committed to climate change, which is measured by a score scale provided by the Carbon Disclosure Project, contribute less to systemic risk. Furthermore, we expect that banks that slip into the lowest score category by not even providing sufficient information on their climate change activity (“worst rating”), and banks that reduce their commitment along the climate change score scale will increase their exposure to systemic risk (“downgrade” effect). The results confirm all our hypotheses. Banks’ commitment to climate change is an important driver of systemic risk, and the level of this commitment also matters. We demonstrate the effectiveness of climate change management in reducing a bank’s contribution to the overall financial crisis and thereby increasing financial stability. Our study confirms the importance of the efforts to combat climate change for the benefit of financial stability.