Climate-related financial policies and bank risks: do environmental sustainability factors matter?

Purpose This paper examines the impact of climate-related financial policies (CFPs) on bank risks, utilizing a comprehensive global dataset spanning from 2000 to 2021. It explores whether CFPs influence bank risk levels across different regions and regulatory environments. Design/methodology/approach Using a dataset comprising 2,534 bank-year observations, this study employs robust econometric techniques, including two-stage least squares (2SLS) and difference-in-differences (DiD) approaches, to mitigate endogeneity concerns and validate the findings. The analysis distinguishes between regions with strong regulatory frameworks, such as North America and Europe, and those with weaker regulatory settings, such as Asia and developing countries. Findings CFPs generally reduce bank risks in regions with strong regulatory frameworks, such as North America and Europe. However, in Asia and developing countries, CFPs initially increase risks, highlighting transitional challenges. Environmental sustainability factors moderate this relationship, with stronger CFP effects in countries with weaker environmental policies. These findings align with stakeholder theory and the resource-based view. Practical implications This study provides critical insights for policymakers and financial regulators by highlighting the need for region-specific CFP implementation strategies. While CFPs enhance bank resilience to climate-related risks, their effectiveness depends on regulatory maturity and economic conditions. Financial institutions must integrate tailored risk management strategies to navigate the short-term challenges associated with CFP adoption in developing economies. Originality/value Evidence from this research provides on the differential effects of CFPs on bank risks across diverse regulatory and economic contexts, offering insights into financial policy effectiveness.