Climate-related prudential regulation tools in the context of sustainable and responsible investment: a systematic review

Diego Hidalgo-Oñate, Iluminada Fuertes-Fuertes and J. David Cabedo

Climate Policy, 2023, vol. 23, issue 6, 704-721

Abstract: Several major economies have already committed to achieving a carbon-neutral economy by 2050, in accordance with the Paris Agreement. The banking system in all countries has a key role to play in supporting the transition to a low-carbon economy, and academia has been researching the prudential regulation tools that will enable the incorporation of climate risk management into banking. However, no studies to date have attempted to systematize research on Climate-related Prudential Regulation Tools. This study conducts a systematic review of the English-language peer-reviewed literature produced on this topic in the period since the 2007–2008 financial crisis, revealing the state of the art and the research gaps. The thematic synthesis carried out in this study shows the experience of some countries in the implementation of these tools and the advancement of academic knowledge in this field. These findings can serve as a reference for the further development of a harmonized international framework to address climate risk in banking.Central banks are considering sustainable and responsible investment (SRI) in their agenda to align national financial systems towards internationally-agreed climate goals.The academic research community is also investigating how to integrate climate risk into the prudential regulation tools available to financial regulators.A concentration of research in developed countries, mainly in Europe, and a significant increase in the publication of studies has been observed in recent years.Scientific research has focused on five prudential regulatory tools: disclosure requirements, climate-related stress testing, differentiated capital requirements, targeted refinancing lines, and green finance guides and frameworks.Research gaps identified include green bubble, double materiality, interaction between policies, compound risks, banking governance, and small and medium-size enterprize (SME) banking. They are cross-cutting issues that could increase the body of knowledge on climate-related prudential regulation tools.

Date: 2023
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DOI: 10.1080/14693062.2023.2179587

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