Bank profitability under environmental and climate pressures: the case of European banks

We investigate the asymmetric effects of climate-related actions on the profitability of a sample of more than 40 European banks over the period 2006–2022. We focus on two dimensions of climate actions related to transition risk, country-level climate change performance and bank-level environmental initiatives, and employ an asymmetric non-linear autoregressive distributed lag model. Our findings indicate that positive changes in both country-level and bank-level climate actions enhance profitability in the long run. Conversely, in the short run, these actions yield negative effects, and negative changes in climate-related actions reduce bank profitability. Furthermore, banks with greater investment activities are more sensitive to changes in climate-related actions. These results demonstrate that while proactively addressing climate risks incurs short-term costs, it is economically beneficial for banks in the long run. This highlights the crucial role of both bank-level sustainability initiatives and supportive national climate policies in fostering bank profitability within a low-carbon economy.