A study of the impact of climate transition risk on the profitability of commercial banks

Abstract Climate transition risk has become an increasingly important challenge for commercial banks during the low-carbon transition process. Using carbon dioxide emissions from six carbon-intensive industries and industry-level bank loan data, this study constructs a climate transition risk indicator for Chinese listed commercial banks from 2010 to 2022 and examines its impact on bank profitability. Employing a two-way fixed effects model, heterogeneity analysis, moderating effect tests, and a series of robustness checks, the study finds that climate transition risk significantly reduces bank profitability. The negative effect is more pronounced among state-owned and large commercial banks, while it is relatively weaker for joint-stock banks, regional banks, as well as small and medium-sized banks. Further analysis reveals that bank size and non-performing loan ratios partially mitigate the adverse impact of transition risk on profitability. The findings suggest that banks with high exposure to carbon-intensive industries should strengthen climate-related risk management and gradually optimize their credit structure during the green transition process. The study also provides evidence for regulators to implement differentiated climate finance policies across different types of banks.