Climate risks, financial performance and lending growth: Evidence from the banking industry

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This study examines the impact of climate-related risks, specifically physical and transition risks, on bank performance and lending growth. Using panel data from 147 international banks across 37 countries from 2011 to 2020 and climate data from the Carbon Disclosure Project, our findings show that transition risks positively impact both performance and lending growth, whereas physical risks negatively impact performance and loan growth. Consequently, the inclusion of transition risks in banks' risk frameworks has allowed them to benefit from climate-related policy changes imposed by regulatory bodies, but this does not hold true for physical risks. Although banks recognize the severe impact that physical risks may have on their businesses, they still cannot protect their performance against extreme weather events, particularly because most of these events are characterised by a high degree of uncertainty. • Transition risk positively impacts bank performance and lending growth. • Physical risk negatively affects ROA, ROE, and loan growth. • High CDP scores correlate with lower risk-weighted asset returns. • Proactive climate risk management enhances bank performance and resilience.