Climate and Environmental Risks and Opportunities in the Banking Industry: The Role of Risk Management

Abstract

Banks are called to address risks and opportunities posed by climate change to their business model. A clear understanding of this ‘new’ type of risks is necessary to adequately incorporate them in the bank strategic decision process and to translate them in specific investment and lending policies and targets. In this paper, focusing on a sample of 102 European listed banks during the period 2008-2021, we provide fresh empirical evidence of the crucial role of the risk management function in increasing bank’s awareness of risks and opportunities associated with climate change and fostering the implementation of a sound environmental strategy. We confirm this relationship in a quasi-natural experiment setting built around the adoption of the 2015 Paris Agreement. We also provide evidence of the relevance of environmental-oriented governance mechanisms in fostering the adoption of a climate and environmental strategy and in strengthening the role of the risk management. Taken together, these results fill a gap in the academic literature and advance the knowledge of the conditions that allow for the achievement of green goals by the banking system, thus providing clear management and policy implications.

Keywords: banks, Risk management, climate change, Climate Risk, environmental performance