Climate transition risk of financial institutions: measurement and response

Sitong Yang, Shouwei Li and Zhilei Pan

Applied Economics Letters, 2023, vol. 30, issue 17, 2439-2449

Abstract: Climate risk significantly impacts financial institutions’ stability, and it is critical to quantify the climate risk of financial institutions. This paper proposes a climate transition risk measure for Chinese financial institutions from the perspective of credit assets and carbon emissions. Based on panel data of 30 regions from 2011 to 2018, we use the system GMM model to assess the response of financial institutions to climate transition risk. We find that the climate transition risk for Chinese financial institutions shows steady growth over the sample period. Second, there is significant regional heterogeneity in climate transition risk, with high levels in the eastern regions and low levels in the central-western regions. Third, Chinese financial institutions have not generally responded positively to climate transition risk, but the eastern regions’ financial institutions responded positively. In addition, the green credit policy does not positively affect the response of financial institutions to climate transition risk. Therefore, the decision-making framework of financial institutions should fully incorporate the increasing effects of climate transition risk, consider regional heterogeneity, rely on green policy, and strengthen the assessment and monitoring of the climate action progress to optimize the climate risk management strategy of financial institutions.

Date: 2023
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DOI: 10.1080/13504851.2022.2097630

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