The Impact of Fossil Fuel Financing on Firm Value and the Role of Climate Policies and Global Climate Initiatives in the Banking Industry

ABSTRACT This study examines the impact of banks' fossil fuel financing on their firm value in the context of the Paris Climate Agreement. Using panel data from the top 60 global banks by asset size from 2017 to 2022, we analyze the effect of fossil fuel financing on firm value, measured by Tobin’s Q, using an OLS model. We also investigate whether national climate policies and climate initiative participation moderate this relationship. The study finds that in the absence of strong climate policies, banks’ fossil fuel financing is positively associated with firm value. However, when robust country climate policies are in place, this relationship reverses, showing a negative association between banks’ fossil fuel financing and firm value. This indicates that in the absence of strong climate policies, banks may hesitate to adopt low‐carbon strategies due to concerns over potential declines in firm value. Additionally, while global climate initiatives alone do not show a significant moderating effect, those accompanied by strong monitoring mechanisms demonstrate a significant negative moderating effect. These findings suggest that for a successful transition to a low‐carbon society through the power of banks’ financial resources, robust climate policies and the widespread adoption of binding climate initiatives are imperative.