ESG performance and climate transition risk spillover of bank system

Climate transition risks of financial institutions have received close attention in recent years, but there are few studies on how it overflows into the non-financial companies. We innovatively measure the spillover of banks' climate transition risk to non-financial companies by examining the sensitivity of stock market performance to the climate transition risk from the bank sector to discuss how the corporate ESG performance mitigates the climate transition risk spillover from the Chinese banking system. Our findings show that ESG can significantly mitigate the spillover of bank climate transition risk, with a significant economic effect that a standard deviation increase of ESG leads to a 40.97 % reduction of the spillover of bank climate transition risk on average. Mechanism tests show that better ESG performance firms experience increasing information transparency, easing financial constraints, and decreasing agency costs to resist the spillover of bank climate transition risk. We further analyze the heterogeneity impacts in several subsamples. Our results consistently suggest that ESG performance is important in mitigating the transformation risks of enterprises.