Climate stress test: bad (or good) news for the market? An event study analisys on euro zone banks

Costanza Torricelli, Chiara Pederzoli and Fabio Ferrari
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Chiara Pederzoli: University of Milano Bicocca and CEFIN – Center for Studies in Banking and Finance
Fabio Ferrari: University of Modena and Reggio Emilia

Annals of Finance, 2025, vol. 21, issue 1, No 1, 17 pages

Abstract: Abstract This paper investigates how the 2021 ECB Climate stress test affected the market view on the climate risk exposure of the banking sector. To this end, we set up an event study analysis on stock returns of the banks included in the exercise, whereby at the relevant dates we test for the existence of abnormal returns. The potential hypothesis is that bad/good news on climate risks exposure of banks may negatively/positively impacts their profitability and hence stock returns. Three main results emerge from our analyses. First, the stress test announcement had no significant impact on banks stock returns, a result that can be explained by the type of information given, i.e. only the methodology and some preliminary mainly qualitative evidence. Second, and by contrast, the publication of the final results with quantitative details determined a positive significant reaction, since the market possibly expected banks’ exposure to climate risks to be greater. Third, an event related to the worldwide consensus on the need to manage climate change (COP26), yet not strictly related to the climate stress test, had no significant market impact. Our results, which are robust to various checks, may have policy implications for future climate stress tests and institutional initiatives needed to manage climate risk.

Keywords: Banks climate stress test; Physical risk; Transition risk; Abnormal returns; Event study; G14; G28; F55 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10436-024-00459-0

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