ABSTRACT This study examines the impact of environmental credit risk on bank financial performance, with a particular focus on the moderating role of country‐level climate risk. Using a global panel of 345 listed banks across 75 countries from 2018 to 2022, we measure environmental credit risk through Fitch Ratings' Environmental Relevance Scores. The results show that greater exposure to environmental credit risk, arising from both borrower‐level vulnerabilities and banks' own ESG profiles, is associated with lower profitability, reduced solvency and diminished market valuation. Interestingly, this negative relationship is partially mitigated in countries with higher climate risk, suggesting that institutional awareness and environmental governance can buffer adverse financial outcomes. These findings are robust across alternative performance metrics, identification strategies and estimation techniques. The study offers practical implications for bank risk management, investor ESG strategies and policymaking at the intersection of environmental, climate and financial systems.
Mouti et al. (2025) studied this question.