Basel Committee

on Banking Supervision

Working Paper 40

The effects of climate

change-related risks on
banks: a literature review
by Olivier de Bandt, Laura-Chloé Kuntz, Nora Pankratz,
Fulvio Pegoraro, Haakon Solheim, Greg Sutton,
Azusa Takeyama and Dora Xia

December 2023
The views expressed in this Working Paper are those of their authors and do not necessarily represent the
official views of the Basel Committee, its member institutions or the BIS.
This publication is available on the BIS website (www.bis.org/bcbs/).
Grey underlined text in this publication shows where hyperlinks are available in the electronic version.

© Bank for International Settlements 2023. All rights reserved. Brief excerpts may be reproduced or
translated provided the source is stated.
Contents

Executive Summary........................................................................................................................................................................... 1

Introduction ......................................................................................................................................................................................... 1

Part 1: Transmission channel of climate change on regulatory and lending standards ....................................... 2
1.1 Credit risk ........................................................................................................................................................................... 2
1.1.1 Impact on lending spreads due to acute and chronic physical climate risk ......................... 3
1.1.2 Impact of the transition to a low-carbon economy on lending and bond spreads .......... 4
1.2 Market risk ......................................................................................................................................................................... 8
1.2.1 Physical risk ..................................................................................................................................................... 8
1.2.2 Transition risk ................................................................................................................................................. 9
1.3 Lending standards ........................................................................................................................................................ 11
1.3.1 Banks’ supply of credit / credit rationing to sectors affected by physical risk ................... 11
1.3.2 Banks’ supply of credit / credit rationing to energy-inefficient real estate or
industries with high emissions (brown and black sectors)......................................................... 12
1.3.3 Banks supply of credit to green industries ....................................................................................... 12

Part 2: sector specific channels of transmission .................................................................................................................. 16

2.1 Climate impact on the pricing of property ......................................................................................................... 16
2.1.1 Effects of physical risks ............................................................................................................................. 16
2.1.2 Transition risk to property prices ......................................................................................................... 20
2.2 Climate impact on non-financial firms ................................................................................................................. 21
2.2.1 Physical risk ................................................................................................................................................... 21
2.2.2 Transition risk ............................................................................................................................................... 22
2.3 Climate impact on government bonds ................................................................................................................ 22

Part 3: Aggregate and macro-economic effects ................................................................................................................. 23

3.1. Aggregate effect on banks......................................................................................................................................... 24
3.2 Effects on the overall banking system, in particular through the lens of stress tests ....................... 24
3.2.1 Bottom-up stress tests ............................................................................................................................. 24
3.2.2 There is limited evidence of non-linearities at the aggregate level ....................................... 25
3.2.3 Research is active to assess second-round effects of climate change-related shocks ... 25

Conclusion and suggestions for future work ....................................................................................................................... 28

References .......................................................................................................................................................................................... 30

The effects of climate change-related risks on banks: a literature review iii

The effects of climate change-related risks on banks:
a literature review

Olivier de Bandt (Bank of France), Laura-Chloé Kuntz (Deutsche Bundesbank), Nora Pankratz (Board of
Governors of the Federal Reserve System), Fulvio Pegoraro (Bank of France and ACPR), Haakon Solheim
(Norges Bank), Greg Sutton (Financial Stability Institute), Azusa Takeyama (Bank of Japan) and Dora Xia
(Bank for International Settlements) 1

Executive Summary

As shown by IPCC (2023), the effects of climate change are likely to accelerate over the coming years, with
a growing consensus among experts as surveyed by NGFS (2023).
The scope of the review is to describe the recent empirical literature in economics and finance
focusing on how banks are affected by climate change, with a particular emphasis on microeconomic
evidence.
Many of the studies which analyze the impacts of climate change on the economy and the
financial system rely on modeling assumptions at the macroeconomic level. In order to improve upon
these assessments, granular information is required on the effect of climate change on specific portfolios,
which will then help calibrate the models used for stress tests.
The particular focus of the paper is to understand the reason why the impact on banks as
observed so far is relatively moderate. We consider two alternative hypotheses: whether the risk is
effectively small, or negligible, or whether it is mispriced by banks or markets, which would be more a
source of concern for supervisors.
We investigate the effects of climate change on three metrics: credit risk, market risk and lending
standards. We also discuss the impact of climate change on particular portfolios, namely residential and
corporate real estate, as well as more generally the effects of climate change on non-financial corporates
as well as central and local governments (states and municipalities). We also broaden the perspective by
considering macroeconomic interactions, as well as second round effects, which are not negligible in the
analysis.
All in all, the main contribution of the paper is to provide a distribution of impact of climate
change across the papers under review, considering credit spreads, bond spreads, expected returns on
non-financial corporate equity, and real estate prices.
The main conclusions are that:
1. Apart from a few outliers, according to the overall distribution of impact across academic studies,
the microeconomic impact of climate change on particular portfolios is so far relatively small,
below 50 bp on loan and bond spreads. Stock markets appear to react more significantly and
have started pricing some, but maybe not all, the risks. There is some evidence of discount in real
estate prices for high flood risk areas. As a consequence, significant uncertainty remains
regarding the magnitude of the effects of climate change.

1
The work stream was led by Olivier de Bandt. Comments by other members of the Research Group as well as from other Basel
Committee groups are gratefully acknowledged, but remaining errors are from the authors.

The effects of climate change-related risks on banks: a literature review 1

2. There are various reasons that may explain why at the macro level banks may be able to manage
risks from climate change, although the situation might change over time, as climate change
accelerates. Several authors conclude that realized returns on assets related to companies
vulnerable to climate-related risks are below expected returns, providing evidence of
underestimation of risk.
3. New dimensions are uncovered, like the impact of Environmental ESG criteria for lenders and
borrowers as well as the effect of reporting on exposures, which also help partly reduce
uncertainty. However, the liquidity impact of climate risk is under-researched.
4. The overall impacts of climate change, which are multifaceted and affect various portfolios at the
same time and in a correlated fashion, might be more significant.
5. There are still data issues, notably in terms of granularity, as well as methodological issues, which
prevent a definite assessment of the situation, both for physical risk (lack of exact location of the
exposures in many instances) and transition risk (notably the lack of evaluation for SMEs).
All in all, one may conclude that the overall balance is more in the direction of an underestimation
of the risks from climate change from the perspective of banks, rather than a situation where the risks are
likely to be fully measured and managed by banks. The main channel is the materialization of unexpected
risk insufficiently priced in lending or bond spreads.

Keywords: climate change, banks, bond spreads, loan spreads, equity returns
JEL: Q54, Q52, Q51, G21

2 The effects of climate change-related risks on banks: a literature review

Introduction

While experts agree on the urgency of policy action to alleviate the effects of climate change (European
Central Bank, 2022), the economic and financial literature often indicates that, so far, climate change has
had ambiguous measurable effects on bank risk in advanced countries.
The scope of the review is the empirical literature published in top refereed journals in economics
and finance, focusing on how banks are affected by climate change and the transition to a low carbon
economy. The review includes 190 papers and covers the effects on both credit risk and credit supply;
impacts on market risk are also examined. 2 This may let aside practitioners’ results, but it allows us to be
more confident and to trust results on the basis of a clear and transparent methodology.
While the IPCC concludes that there is a quasi-linear relationship between accumulated emissions
and earth surface temperature (IPCC, 2022, 6th Report), global emissions are accelerating. Therefore,
conclusions based on past evidence is likely to underestimate the amount of climate change-related
damages, including the effects on banks’ portfolios. In addition, there is evidence that some markets might
ignore climate related information. There may be good reasons for limited reactions of participants in
financial markets in some instances, for example when exposures have a short maturity (Acharya et al.
2023). Nevertheless, Eren et al. (2022) note that concerns are growing that current financial asset prices
do not sufficiently reflect climate risks. There is thus a risk that future price corrections can be more
pronounced in such areas, creating a risk to financial stability. That said, there are no clear benchmarks
that quantify climate risks and fair pricing of such risks. Therefore, it is not feasible to gauge whether
current asset prices underestimate or overestimate climate risks and the scope for repricing. It should also
be noted that most of the empirical literature is concentrated on advanced economies – Europe, United
States, Japan, and Australia. Only a few studies look at effects in emerging markets, despite these countries
being potentially more vulnerable to both physical climate risk and the costs of transition.
Before going into detail on the evidence provided by the literature, it is useful to offer a general
perspective of the issues at hand. The ultimate impact of climate-related risks, both physical and transition
risks, on banks’ credit exposures is not easy to quantify. This is true for a number of reasons. One is that
conventional risk models do not capture potentially severe facets of climate-related risks, such as tipping
points and outcomes such as climate-induced mass migrations and associated warfare. This omission is
understandable, as these effects are extremely difficult to model; yet their omission is likely to lead to an
underestimation of the impact of climate change on banking systems and economies more broadly (e.g.,
Stern (2013)). A second reason is the indirect nature of climate-related risks for banks, such as impacts to
their customers’ supply chains arising from climate physical risks, and the unpredictability of transition
risks associated with political measures to mitigate climate change. Third, and perhaps the main reason
why it is difficult to quantify the impact of climate change, is the related uncertainty. For example, as noted
by Lenton et al. (2019), there is a lot of uncertainty about how much ice sheets will melt, given any assumed
amount of global temperature rise. And, as noted by Pindyck (2020), considerable uncertainty remains
about how much average temperatures will rise given any assumed path for greenhouse-gas emissions.
For example, the extent of coastal flooding from future sea level rise (SLR) is likely to be substantial but
highly uncertain, making it extremely difficult to estimate damages to coastal real estate from future SLR.
All in all, the long-term forecasting horizons and data gaps only make the task of estimating the impact
of climate-related risks more difficult.

2
The analysis is based on papers published since 2010 in refereed economics and finance journals, as well as a few energy and
environment journals. In order not to miss more recent contributions, we also consider working papers by the NBER, the BIS,
the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the European Central Bank, the
Deutsche Bundesbank, the Banque de France, and CEPR Discussion Papers.

The effects of climate change-related risks on banks: a literature review 1

 It is important for climate-related risks to differentiate between risk and Knightian uncertainty
(Stern (2007, 2013)). For example, the uncertainty associated with SLR is arguably Knightian in nature,
meaning that the probability distribution of future SLR is quasi-unknowable due to variation across climate
models, uncertainty related to the level of emissions, as well as the translation of emissions into
temperature increases. At the same time, probabilities associated with various levels of SLR are required
for standard risk analyses. Despite this uncertainty, most research finds a measurable impact of climate
risk on banks’ credit exposure. Some research tries to capture the effects of this uncertainty, e.g., Ilhan,
Sautner and Vilkov (2021) show that climate policy uncertainty seems to be priced in the option market.
More precisely, the cost of option protection against downside tail risk is larger for S&P 500 firms with
more carbon-intense business models.
Putting these pieces together and keeping in mind the uncertainty of the analyses as well as the
lack of comprehensive analysis for banks’ credit and market exposure as almost all papers focus on specific
borrower types (see Kousky et al. (2020b) and Capasso et al. (2020)), it becomes apparent why climate risk
in banks’ credit exposures might not yet be well-understood.
Beyond these caveats, it is important to survey the available evidence, with a view to
complementing past reviews, 3 given the significant acceleration of published works in the area of climate
change-related risks. Moreover, the review concentrates on the transmission channels to banks.
Note that the regulation of banks regarding their exposure to climate change is not addressed
in the paper. Although we rationalize the existing quantitative literature, uncertainties on the magnitude
of the impact remain.
The paper is organized as follows. Part 1 discusses the effects of climate change on credit risk,
market risk and lending standards. Part 2 investigates the specific impacts on real estate prices, both
residential and corporate real estate, as well as more generally the effects of climate change on corporates
as well as central and local governments (states and municipalities). Part 3 broadens the perspective by
considering macroeconomic interactions. Part 4 concludes and makes suggestions for future research.

Part 1: Transmission channel of climate change on regulatory and lending

standards

This part focuses on general issues related to the effects of climate change on credit risk and market risk,
as well as lending standards (in particular lending volumes). Credit risk includes risk of default on loan and
bond exposures, while our review of market risk mainly concentrates on equities and other non-bond
exposures traded in securities markets (see also European Systemic Risk Board, 2021 and 2022).

1.1 Credit risk

Credit risk is an important dimension of banks’ portfolio management. It is managed by banks through an
assessment of the probability of default (PD) and may translate into lending spreads, or more generally
bond spreads. As argued by Acharya et al. (2023), a key aspect of the risk sensitiveness of banks’ banking
books is the maturity of bank loans. To the extent that banks can reshuffle loan portfolios before climate
change-related risks materialize, they will not be much affected by climate shocks. 4 There are nevertheless
two caveats. First, banks do hold assets displaying long-term maturities, especially for real estate. This

3
See BCBS (2021a) and BCBS (2021b).
4
This may distinguish banks from insurance companies (see box below).

2 The effects of climate change-related risks on banks: a literature review

issue is discussed more fully in section 2.1. Second, banks’ franchise values will be affected if their
traditional customers and notably non-financial companies are threatened by climate change, as discussed
in section 2.2.
Here we discuss general findings on credit risk, leaving these more specific issues notably the
effect on real estate prices (and collateral value) for part 2. First, we cover physical risk (1.1.1), then
transition risk (1.1.2).
We gather empirical evidence from around 30 papers with a quantitative estimate, that we
summarize in charts on the distribution of the documented estimates. The charts distinguish between loan
spreads (Figure 1) and bond spreads (Figure 2), and within each figure, between physical and transition
risk. 5 Even if the estimates appear comparable, one should keep in mind a few limitations: climate shocks,
notably physical, are of different kinds as explained below (with floods, sea level rise, drought, etc as
opposed to public policies limiting GHG emissions) and the empirical results are backward-looking.

1.1.1 Impact on lending spreads due to acute and chronic physical climate risk

1.1.1.1 Loans to agriculture

The agricultural sector is directly affected by physical climate risks. In a comprehensive simulation, Brar et
al. (2021) conclude that not accounting for climate change-related risks in agricultural loans leads to an
underestimation of the riskiness of these loans. At the country level, Kraemer and Negrilla (2014) find that
poorer countries are more exposed to climate risk, because agriculture sectors account for a larger share
of GDP in these countries (see also de Bandt, Jacolin and Lemaire, 2021).

1.1.1.2 Floods
Physical risks not only destroy property and harvests, but also impact the probability of repayment of retail
loans as Kousky et al. (2020b) show. After a flood event, the probability of default (of a non-insured
moderately priced property) increases by 2.6 times after two years.
Correa et al. (2023) find that, following climate change-related disasters, banks charge higher
spreads on loans to indirectly affected borrowers with recently high exposure to these types of disasters.
This effect varies from 19 basis points for hurricanes to about 8 basis points for wildfires and floods. These
changes in loan spreads are economically sizable, as they represent between 5% and 10% of the
unconditional spread charged on loans included in the sample.
Garbarino and Guin (2021) study how lenders react after a flood event using UK data for the mid-
2010s. In contrast to other studies, they find that “banks do not mark-to-market against local price declines
and lenders do not offset the valuation bias by adjusting interest rates or loan amounts”. The absence of
effects of floods in their analysis may be explained by public flood subsidizing high income households,
and high-income households self-select into high flood areas. Indeed, there is a general concentration of
wealthy borrowers along rivers and seashores that are most affected by climate change-related risks.

1.1.1.3 Heat and droughts

The empirical analysis proposed by Do et al. (2021) shows that banks charge higher interest rates to
borrowers located in drought-located areas. In addition, this higher premium is more pronounced for food

The figures report the impact arising from a unit climate risk shock, i.e. , where y is the credit or lending spread, measured in
5 Δ𝑦𝑦
Δ𝑥𝑥
basis points, and ∆x is a unit climate shock. The latter depends however on the nature of the risk, with a cross-sectional
dimension for transition risk (e. g. difference in carbon emissions) and a time series dimension for physical risk (e. g. probability
of flood occurrence or heat wave).

The effects of climate change-related risks on banks: a literature review 3

industry borrowers; a one standard deviation increase in their adopted drought measure induces an
increase of 11 bp on the interest rate charged to food industry borrowers.
Acharya et al. (2022) show that heat stress is correlated with municipal bond yield spreads and
document an increase of 15 bp per annum. The authors conclude that “the effect is larger for longer-term,
revenue-only and lower-rated bonds, and arises mainly from the expected increase in energy expenditure
and decrease in labor productivity”. In particular they find that “among S&P 500 companies, a one standard
deviation increase in exposure to heat stress is associated with yield spreads that are higher by around 40
bp for sub-investment grade corporate bonds”.
Similarly, Javadi and Masum (2021) find empirical evidence that firms in regions exposed to
droughts pay significantly higher spreads on their bank loans: loan spreads of firms in the top quartile of
climate risk exposure are about 4.4% larger than those of firms in the bottom quartile. The authors follow
Huynh et al. (2020) and use the location of a firm’s headquarters to measure its exposure to climate risk.
They assume, as observed in previous research, that a firm’s headquarter location is usually close to its
operations and core business activities. To alleviate the concern regarding the validity of this assumption,
they also include information on the location of the customers of the borrowing firms They conclude that
the interest rate spread on loans is significantly higher for firms when their customers are more exposed
to climate risk. In addition, the authors conclude that “the effects are even more pronounced for long-
term loans of poorly rated firms”. For example, they assess that “loan spreads are about 5.8% higher for
long-term loans of poorly rated firms in the top quartile of climate risk than those in the bottom quartile”.
The study also adds supporting evidence to the notion that climate risk is not fully anticipated as they find
no significant difference between firms in the food industry and others (see 1.2. for similar results for
equities).

1.1.1.4 Sea Level Rise (SLR)

As far as SLR risk is concerned, there is evidence on the effects of climate change, for loans and bonds.
For loans, Nguyen et al. (2022) show that lenders charge higher interest rates for mortgages on
residential real estate exposed to more SLR. The main conclusion is that the interest rate spread for
mortgages in a zip code where all residential real estate are exposed to SLR risk is approximately 7.5 bp
higher than the interest rate spread for mortgages in a corresponding area where none of the properties
are exposed to SLR risk.
For bonds, Goldsmith-Pinkham et al. (2021) show that chronic SLR risk, as well as acute flood risk,
impact the price of municipal bonds of the affected counties. In general, the premium seems to be driven
by the uncertainty of the impact of the SLR risk and not by a reduction in asset values. In addition, Auh et
al. (2022) analyze whether the increase of frequency or intensity of natural disasters impacts the riskiness
of the municipal bonds of the affected issuer-county. The authors find that the investor’s loss (as holders
of the municipal bonds) is around half of the estimated physical damage induced by the relevant natural
disaster. This corresponds to a loss of around 31 bp for the investors in the weeks after a disaster.

1.1.2 Impact of the transition to a low-carbon economy on lending and bond spreads

a) Bank loans
For higher risks and spreads on bank loans facing transition risk, there is evidence on both the corporate
loan and mortgage markets. Some studies only consider default risk. Others offer a more complete analysis
and also measure the implications of loan spread adjustment to higher risk.

4 The effects of climate change-related risks on banks: a literature review

Impact of climate change on loan spreads
12 entries Figure 1

10
9
8
7
6
5
4
3
2
1
0
0-25 25-50 50-75 75-100 >100

Physical Transition

Source: authors’ calculations, based on the review of 12 estimates provided by the academic literature, number of studies (vertical axis)
providing an estimate of yield spreads of bank loans, in basis points (horizontal axis). Impact is usually measured as the response to a one
standard deviation on climate change exposure. The articles displayed here are: Beyene et al. (2022); Chava (2014); Correa et al (2023); Degryse
et al (2023); Delis et al. (2021); Do et al. (2021); Ehlers et al. (2022); Garbarino and Guin (2021); Huang et al (2021); Javadi and Masum (2021);
Kleimeier and Viehs (2018); Nguyen et al. (2022). The studies investigating shocks in terms of physical risk are depicted in blue, transition risk
in red. The reference above 100 bp is Huang et al. (2021).

Impact of climate change on bond spreads

15 studies Figure 2

10
9
8
7
6
5
4
3
2
1
0
0-25 25-50 50-75 75-100 >100

Physical Transition

Source: authors’ calculations, based on the review of 15 estimates provided in the academic literature, number of studies (vertical axis)
providing an estimate of yield spreads on corporate or sovereign bonds, in basis points (horizontal axis). Acharya et al (2022) -2 entries; Auh
et al. (2022); Baker et al (2018); Cevik and Tovar Jalles (2020); Goldsmith-Pinkham et al. (2021); Höck et al. (2020); Kim and Pouget (2023) -2
entries; Painter (2020) -2 entries; Pastor (2022); Seltzer et al (2022); Xia and Zulaica (2022); Zerbib (2019). The studies investigating shocks in
terms of physical risk are depicted in blue, transition risk in red. The reference above 100 bp is Höck et al. (2020).

The effects of climate change-related risks on banks: a literature review 5

 Delis et al. (2023) analyze in the corporate loan market the extent to which U.S. banks price firms’
climate policy risk exposure to (stranded) fossil fuel reserves. In particular, they estimate whether banks
charge a higher loan rate to fossil fuel firms. The authors find that (1) the effects of fossil fuel reserves held
by the borrowing firms, on the loan rate is more pronounced for firms in countries with stringent policy,
or with close costal proximity; (2) fossil fuel firms obtain larger loans compared to non-fossil fuel firms;
and (3) higher loan pricing to fossil fuel firms by “green banks”. Their results also support the view that the
fossil fuel industry has lost some access to equity finance, leading to larger borrowing by these firms. Thus,
part of the reason that these firms pay larger spreads could be related to greater loan demand. Consistent
with this idea, Degryse et al. (2023), based on international syndicated loans, show that green firms borrow
at a significantly lower spread, especially when the lender consortium can also be classified as green,
especially after the Paris Agreements. Huang et al. (2021) investigate the impact of the Clean Air Action
that the Chinese province of Jiangsu implemented in January 2014 as a quasi-natural experiment. Based
on a sample of 1.3 billion loans they show that the lending spread to polluting firms significantly increased
by 130 bp, which is equivalent to 5.5% of the mean lending spread.
Ehlers et al. (2022) investigate whether a higher carbon intensity drives the associated risk
premium a company has to pay. Although the premium is rather small, the authors conclude that banks
charge higher loan spreads only in case of higher emissions narrowly attributable to the firm’s activity, and
not to the broader carbon footprint of the firm (i.e. indirect emissions related to energy consumption and
production inputs). In addition, while “green banks” may lend less to high carbon emitters than other
banks, they do not appear to charge a higher carbon premium.
Kaza et al. (2014) find that mortgages on energy-efficient homes have significantly lower risks
than those on less efficient homes. The risk of default is about one third lower compared to the control
group. In addition, the more energy efficient, the lower the mortgage risk. An increase in the energy
efficiency by 1 point decreases the probability of a default by 4% and decreases the chance of prepayment
by 2%, measuring the higher performance of energy-efficient projects from the lenders’ perspective.
However, the authors do not consider the potential endogeneity of the results in the sense that more
affluent (hence less risky) borrowers can more easily afford more efficient housing.
Guin et al. (2022) improve upon the previous methodologies and examine the relative riskiness
of residential mortgages depending on the energy efficiency of the underlying real estate as well as
borrowers’ risk characteristics. For a data sample collected in the United Kingdom, the analysis concludes
that the energy efficiency of residential real estates reduces the frequency of mortgage payment arrears.
This finding is unaffected when controlling for other relevant determinants of mortgage default, like
borrower income and loan-to-value (LTV).
However, Bell et al. (2023) on pre-2018 loans, so far find “no evidence of lenders charging higher
rates on riskier mortgages against energy-inefficient properties”.

b) Bond spreads
Several studies explore a carbon premium – the extra yield investors demand to buy bonds issued by firms
with more greenhouse gas emissions – in the U.S. corporate bond market. Seltzer, Starks, and Zhu (2022)
find that high emitters have lower credit ratings and higher yield spreads, particularly in states with stricter
regulatory enforcement. Further, they find that the composition of bondholders changed after the Paris
Agreement. Xia and Zulaica (2022) study two potential mechanisms behind the carbon premium in
corporate bonds and find evidence consistent with both: One is the preference channel, under which the
premium reflects investors' preference for firms that they perceive as being more environmentally
responsible. The other channel is the risk channel, where investors perceive more carbon-intensive firms
as more prone to default. Further, the authors find that the premium is larger for firms in more energy-
intensive sectors. Kim and Pouget (2023) study the relation of carbon emissions and yield spreads both in
the primary and secondary corporate bond market. They find that firms with higher emissions have larger
yields than firms with low emissions on the primary market, implying a higher cost of capital of 4 bp.

6 The effects of climate change-related risks on banks: a literature review

However, the premium in the primary market accounts for less than 15% of the one prevailing on the
secondary market and measured at 27.4 bp. Underpinned by a theoretical framework, the authors
document support for both the uncertainty about future climate preferences of investors and limited
competition among primary market dealers as drivers of this difference.
In addition, there is an abundant literature on green bonds (i.e., bonds for which issuance
proceeds are required to be invested in green projects). Zerbib (2019) measures a small negative premium
for the period from July 2013 to December 2017: the yield on a green bond is lower than that on a
conventional bond. On average, the premium is -2 basis points both for the entire sample and euro and
U.S. dollar bonds separately. Baker et al. (2018) study a sample of more than 2,000 municipal and corporate
green bonds and find that green bonds trade at lower yields than bonds with similar characteristics but
without a green label. Pastor et al. (2022) predict that similarly to the existence of a “greenium” for green
bonds (i.e., lower interest rates on green than brown bonds), green stocks have lower expected returns,
but show that ex post, based on realized returns, green stocks outperform brown due to positive surprises
over the sample period. These market reactions provide further evidence that the effects of climate change
are not fully anticipated. Nevertheless, the “greenium” is not very substantial overall. Further research
would need to explain why green and brown bonds issued by the same company may have different
ratings.
The study by Pastor et al. (2022) also highlights the overlap of concerns about climate-related
risk and environmental, social and governance (ESG) performance. As borrower and lender ESG disclosures
can contain relevant information for climate risk management, Box 1 considers research on ESG
information and lending. The perspective of risk for equities is discussed in section 1.2.

Box 1

Box 1: Bank lending and environmental sustainability

A growing literature investigates the impact of environmental, social and governance (ESG) performance and
objectives on credit risk. As discussed by Bolton and Kacperczyk (2022), the increasing importance of such factors
“may reflect the growing frustration with inadequate policies”. We first discuss the research on the effect of ESG
performance on borrowers. Subsequently, we summarize the literature on lenders' ESG scores and outcomes related
to credit risk.

For borrowers, Höck et al. (2020) show that environmental sustainability reduces the credit risk premium
measured in CDS spreads but only for companies with a good creditworthiness. Billio et al. (2022), as well as Carbone
et al. (2022), find that sustainability also affects borrower ratings positively and leads to a decline in the credit spread
for those corporates. In addition, some papers explicitly connect emissions, ESG ratings, and credit spreads. They
document that both high emissions and low ESG ratings are connected to a higher probability of default and higher
credit spreads (Kleimeier and Viehs (2018), Capasso et al. (2020), Ehlers et al. (2022)). Chava (2014) shows that lenders
charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns Further,
the paper documents that banks are also more reluctant to lend to these firms, as witnessed by the lower number of
banks participating in their loan syndicate than for the firms without such environmental concerns. In line with this
evidence, recent papers document a rise of sustainability-linked lending, in which lenders reward sustainable
borrowers with lower lending rates (Kim et al., 2022, Carrizosa and Gosh, 2022).

From the perspective of lenders, Birindelli et al. (2022) show that banks’ commitment to climate issues –
meaning a medium to high attention to this topic – is connected to a lower risk of bank loans. Besides the management
of financial and event risk, the studies allude to lowered reputational risk as a driver of banks’ attention to non-financial
characteristics of their borrowers.

The effects of climate change-related risks on banks: a literature review 7

 Some studies indicate that the effects are concentrated in groups of lenders and borrowers with high
similarity. For instance, Kim, Surroca, and Tribo (2014) study bank lending in 19 countries and find that banks offer
better financing conditions to ethical borrowers as measured by sustainability scores. They document a substantial
decrease in mean spreads by almost 25% for a one standard deviation increase in a measure of ethical behavior of
the borrower. The reduction is even larger with 38% compared to the sample mean when lenders also rank high in
ethical behavior. In line with this result, Hauptmann (2017) finds that borrowers with higher sustainability ratings pay
lower loan spreads only when the lending bank exhibits strong sustainability performance as well. Chen et al. (2021)
find that banks require higher loan spreads from borrowers with higher levels of chemical pollution. Similar to Kim et
al. (2014) and Hauptmann (2017), they document that the effect is concentrated in lenders with higher social
responsibility performance. Moreover, Degryse et al. (2023) show that green banks, measured by their membership in
the UN Environment Program Finance and their reporting to the Carbon Disclosure Project, offer better loan conditions
to green firms after the ratification of the Paris Agreement.

1.2 Market risk

In addition to credit risk, banks could be exposed to climate change through market risk from shocks
associated with sudden changes in stock prices, interest rates, exchange rates, and commodity prices. In
this section, we focus on equity markets, as bond markets are discussed in section 1.1. As Giglio et al.
(2021a) stress, research on market risk is complicated by the fact that investors may have recently started
to pay more attention to climate change-related risks.
As for credit risk, physical and transition risks have different implications for market risk and are
discussed separately. Figure 3 summarizes the estimates in the empirical literature. The same caveats as
for Figures 2 and 3 apply. Also note that the risk premium is not comparable to lending and bond spreads,
as indicators for market risk measure the expected return differential from a brown versus a green
portfolio.

1.2.1 Physical risk

For physical risk, Acharya et al. (2022) conclude that S&P 500 corporations with a one standard deviation
higher heat stress exposure have a 45 bp higher (unlevered) expected return per annum, with the effect
being observed robustly since 2013; Furukawa et al. (2020) show that security prices of corporate bonds
and equities reflect the impact of climate change physical risk. However, investors tend to assess the
impact of climate change-related risks based on “memorable” events rather than all available events. For
example, Hong et al. (2019) demonstrate that drought risk is not priced in food companies’ equity prices
in regions/countries which have not suffered from severe damage of drought for 20–30 years, although
drought risk indicators are globally available. Alok, Kumar, and Wermers (2019) document that
professional money managers overreact to large climatic disasters that happen close to them,
underweighting disaster-zone stocks to a much greater degree than distant mutual fund managers. They
also document that this overreaction can be costly to fund investor performance. In contrast, Choi et al.
(2020) find that in abnormally warm weather, stocks of carbon-intensive firms underperform those of low-
emission firms. An increase of one standard deviation in abnormal temperature corresponds to a decrease
of 16 bp in return. For firms in the United States, Addoum et al. (2023) show that firm profitability is
influenced by extreme temperatures, but stock prices do not immediately respond to temperature shocks.
For firms outside of the United States, Pankratz et al. (2023) reach similar conclusions. They find that heat
reduces revenues and operating income. However, analysts and investors do not appear to fully anticipate
these effects. Moreover, the deviation in analyst estimates from actual financial performance and the
earnings announcement returns become more negative when firms’ heat exposure increases. These
findings indicate that investors do not fully anticipate the economic repercussions of heat as a first-order
physical climate risk.
A possible explanation for this mixed evidence of pricing for climate risks is that it is challenging
for investors to make decisions under deep uncertainty regarding climate change-related risks. Barnett,

8 The effects of climate change-related risks on banks: a literature review

Brock and Hansen (2020, 2022) document that even supervisory authorities and central banks suffer from
shortages in information in policy decision making. Such uncertainty can lead to loss in economic welfare
and biases in resource allocation (ACPR, 2021).

1.2.2 Transition risk

There are three hypotheses on potential transmission mechanisms of transition risk into market risk (Bolton
and Kacperczyk, 2021a).
First, the profitability of firms with high emissions could decline due to a carbon tax, pricing and
other regulatory interventions to limit emissions. Then, forward-looking investors would seek
compensation for holding the stock of these firms ("carbon premium hypothesis").
Second, the prices of securities might not reflect climate transition risk properly and efficiently as
climate change-related financial risks are unconventional. Consequently, conventional methodologies of
market risk measurement (e.g., value-at-risk and expected shortfall) are not directly applicable to risk
management and measurement of climate change-related risks under limited availability of historical data
("market inefficiency hypothesis" or "carbon alpha hypothesis").
Third, the number of institutional investors that commit to socially responsible investment could
continue to increase. These investors pledge to request firms to commit to the reduction in their emissions
and to reduce their investment in firms which are reluctant to reduce their emissions ("divestment
hypothesis").
Regarding the carbon premium hypothesis, Bolton and Kacperczyk (2021a and 2021b) document
a broad range of evidence that investors require a higher expected excess return for investing in the
securities of firms with higher GHG emissions. This is true for the United States as well as from a cross-
border perspective. They conclude that the pricing is uneven across countries, depending on the likelihood
of transition policies, with little effect in Africa, Australia and South America. They also provide robust
evidence (also confirmed by Bolton and Kacperczyk (2022)), that the level of emissions matters more than
the intensity (emissions/value of sales), highlighting the importance of industry fixed effects. There is a
carbon premium for firms within the same industry, which is growing with the size of firms, as bigger firms
are more likely to be concerned with transition policies. They also stress that the premium of high
emissions emerged after the Paris agreement in COP21 in 2015. This indicates that policy initiatives and
international agreements on greenhouse gas emission reduction can send a signal of risk in transition to
a low carbon society. However, it is also noteworthy that other studies find no significant differences in ex
ante return of securities in terms of firms’ GHG emissions (Dai, 2020). As trigger events of transition risk,
the implementation of comprehensive carbon tax/pricing have materialized in only a limited number of
jurisdictions, it is still challenging to identify the source of excess returns of high emission firms. In
particular, Bolton and Kacperczyk (2022) do not uncover a carbon premium for banks.
Similarly, Hsu, Li, and Tsou (2023) find that highly polluting firms are more exposed to
environmental regulation risk and command higher average returns of 4.42% for the United States in the
period 1994–2017, measured by the return of a long-short portfolio from firms with high versus low toxic
emission intensity within an industry. Emissions, not limited to GHGs, are measured by plant-level chemical
pollutants data from the Toxic Release Inventory (TRI) database constructed and maintained by the U.S.
Environmental Protection Agency (EPA).
Bua et al. (2022) investigate the climate risk premium on European equity markets. Using a low-
minus-high transition (physical) climate beta portfolio, they identify positive excess returns, measuring a
climate risk premium 7.05% and 6.14% on average per-year after 2015, for transition and physical risk,
respectively.
The quality of information on firms' carbon emissions is a common challenge for studies on
transition risk. Aswani et al. (2021) find no statistically significant excess return from the data of firms’

The effects of climate change-related risks on banks: a literature review 9

actual disclosure while they find supporting evidence of excess returns from the dataset complemented
by financial data vendors. This finding is consistent with the assessment of financial institutions’
preparedness to conduct scenario analysis of climate change-related risks by European Central Bank
(2022). The majority of banks participating in the exercise conduct their analysis based not on borrowers’
disclosure of emission data but on the estimated emission data provided by third party data vendors.
Similarly, Krueger et al. (2020) show that the majority of institutional investors expect that equity prices do
not fully reflect climate related risks.

Impact of climate change on risk premium for stocks

15 studies Figure 3

0
<0 or 0 0-100 100-200 200-300 300-400 400-500 500-600 600-700 700-800

Physical Transition

Source: authors’ calculations, based on the review of 15 papers in the academic literature, number of studies (vertical axis) providing an
estimate of risk premium on non-green, or carbon-intensive, or non-ESG stocks, in basis points (horizontal axis). Acharya et al. (2022); Addoum
et al (2023); Bua et al (2022) -2 entries; Bolton et Kacperczyk (2021 a and b) – 6 entries; Choi et al. (2020); Hong et al. (2019); Hsu et al (2023);
Giglio et al. (2023); Monasterolo and De Angelis (2020). The studies investigating shocks in terms of physical risk are depicted in blue, transition
risk in red. Note that the risk premium is not comparable to lending and bond spread.

There are two additional strands of the literature that need to be mentioned: the impact of
disclosures and ESG investments in financial market.
First, the disclosure of exposures also has an impact on the equity risk premium. As discussed by
Bolton and Kacperczyk (2022), disclosures reduce uncertainty, leading to a lower premium. Krueger (2015)
studies the effect of mandatory GHG emissions disclosure passed into law in 2013 in the United Kingdom.
His research shows that firms most heavily affected by the regulation experience a significant increase in
Tobin’s Q, as compared to a matched sample of European firms, providing evidence of positive valuation
gains. He further finds that investors value carbon transparency more in carbon intensive sectors: basic
materials (mining) as well as oil and gas production. In an international context, Krueger, Sautner, Tang,
and Zhong (2023) find that ESG disclosure mandates positively affect firm-level stock liquidity. The effects
are stronger for binding mandates compared to comply-or-explain policies and increase under stringent
enforcement. Using survey methods, Ilhan, Krueger, Sautner, and Starks (2023) show that investors value
and demand climate risk disclosures. Further, the authors use the introduction of a law on the energy
transition in France (Article 173) to show that climate-conscious institutional ownership drives better firm-
level climate risk disclosure.
Bolton and Kacperczyk (2021c) report the asymmetric reaction of investors in transition risk
pricing in a response to companies’ new disclosure of GHG emissions. This indicates that firms’ disclosure
of their GHG emissions and exposure to climate change-related risks is helpful to reduce investors’

10 The effects of climate change-related risks on banks: a literature review

uncertainty both in terms of transition and physical risks. Panjwani et al. (2023) find that firms that disclose
scope 3 emissions have a cost of borrowing that is 20 basis points lower, on average (scope 3 disclosure
premium). At the same time, controlling for scope 1 and 2 emissions that lead to higher lending spreads,
higher scope 3 emissions are not associated with a higher cost of borrowing.
Second, and more generally, the literature has also extensively studied the connection between
ESG indicators and market risk, the conclusions of which matter for banks. On the one hand, banks report
increasing attention by investors and a strong demand for ESG investments. On the other hand, the
literature offers conflicting results on ESG performance at this stage. Friede et al. (2015) combine the
findings of about 2200 individual studies and report that 90% of studies find a nonnegative ESG–Corporate
Financial Performance (CFP) relation, and that most studies report positive findings. Further, the positive
ESG impact on CFP appears stable over time, but rather more apparent for bonds than equities. However,
recent papers continue to find heterogeneous effects. Some studies indicate that there is no ultimate
consensus. For instance, Giglio et al. (2023a) find that the average retail investor anticipates negative excess
returns on ESG. They document an average expected 10-year annualized return that is lower by 1.4% for
ESG investments than the overall stock market. They also highlight the heterogeneity of investors’ return
expectations –additional evidence of an absence of definite conclusions – with 25% of investors having
ethical motives, 22% with hedging objectives.

1.3 Lending standards

After lending prices, it is important to study lending volumes. Banks are in a position to adjust credit supply
to changes in risks and expected rewards. Climate change-related factors could affect how banks perceive
these risks and rewards. 6 Banks can in principle play a role in making investments in high polluting or
other exposed sectors more expensive and can provide more (and/or cheaper) credit to potential green
sectors. However, papers differ in terms of ability to effectively identify exposures to climate change-
related risks at a granular level. Syndicated loans offer detailed information on the financing of large
corporations, especially for large energy producing projects such as power plants. Loan registers provide
detailed bank loan level data to assess transition risk for a broader set of exposures (Schubert, 2023),
including SMEs. For assessing physical risk, where information is required at the granular plant level, bank
level data are also used by some authors, but at the cost of a few identifying assumptions (Blickle et al.,
2022). To address these issues, Pagliari (2023) focuses on so called territorial banks, which are more likely
to lend to local firms. Territorial banks are considered less significant institutions, 7 but may be more
concentrated and located in areas that are more prone to flooding and more susceptible to suffer from
climate change-related shocks.

1.3.1 Banks’ supply of credit / credit rationing to sectors affected by physical risk
In the area of physical risk, some papers concentrate on the effects of floods and natural disasters. No
paper investigates the impact of drought and heat stress.
Meisenzahl (2023) uses supervisory data for the largest U.S. banks and finds that after 2015 banks
significantly reduced lending to areas more impacted by floods and wildfires. A one standard deviation
increase in climate risk reduces county-level balances in banks' portfolios by up to 4.7 percent in counties
with large loan balances. However, the reductions are concentrated among borrowers and products with
high credit risk, and low-risk borrowers received more funding even in heavily affected areas.

6
Demand effects by corporates are discussed in section 2.2.
7
Banks that are under indirect ECB supervision (i.e. supervised by national supervision authorities), which are smaller than the
ones under direct ECB supervision.

The effects of climate change-related risks on banks: a literature review 11

 Chavaz (2016) investigates the mortgage lending market’s reaction to the 2005 hurricane season
– the costliest natural disaster recorded in U.S. history, where together, Hurricanes Katrina, Rita, Wilma,
and Dennis damaged 1.2 million housing units. The author studies changes in banks’ mortgage lending in
affected counties compared to elsewhere and before the shock – depending on their geographic
diversification. It appears that the financial capacity channel (whereby local banks have a smaller financial
capacity after the shock as they are less diversified) is dominated by the relative loan profitability channel
(local banks have better technology or higher incentives to lend in affected areas). According to the paper,
local banks increase the share of new mortgages and small business loans in affected areas, but, at the
same time, sell more of the new mortgages in the secondary market.
A small part of the literature tries to link the effects of physical events to bank behavior. Gallagher
and Hartley (2017) investigate the impact of flooding on household finance using Hurricane Katrina. Spikes
in credit card borrowing and overall delinquency rates for the most flooded residents are modest in size
and short-lived. Greater flooding results in larger reductions in total debt. Lower debt levels are driven by
homeowners using flood insurance to repay their mortgages, instead of rebuilding. Mortgage reductions
are larger in areas where reconstruction costs exceeded pre-Katrina home values and where mortgages
were likely to be originated by nonlocal lenders.
Garbarino and Guin (2021) look at how lenders react after a flood event using U.K. data. As
mentioned above in 1.1.1.2, they find that banks do not offset the change in valuation by adjusting interest
rates or loan amounts.
One should stress, however, that extra lending post natural disasters may offset reluctance to
lend to risky borrowers: Blickle et al. (2022) find that disasters increase the demand for loans; new loans
after a natural disaster offset losses on loans on the books. Bos, Li, and Sanders (2022) examine how banks
adjust their asset structure in response to changes in loan demand following natural disasters. The
empirical analysis shows that U.S commercial banks increase real estate lending after disasters and sell
government bonds to finance this credit surge driven by natural disasters.

1.3.2 Banks’ supply of credit / credit rationing to energy-inefficient real estate or industries
with high emissions (brown and black sectors)
Reghezza et al. (2022) find that, following the Paris Agreement, European banks reduced credit to polluting
firms; the same is observed after the withdrawal of the United States from the Paris Agreement; lending
by European banks to U.S. firms decreased. For U.S. banks, Jung, Santos and Seltzer (2023) document a
downward trend in exposures to the riskiest industries, at least partially explained by a reduction in banks’
funding to these industries. Using the estimated sectoral effects of climate transition policies from the
general equilibrium models of Jorgenson et al. (2018), Chen, Goulder and Hafstead (2018), and NGFS
(2022), the authors find that bank exposures appear overall manageable. The largest projected exposures
of the average bank reach 9 percent under the NGFS disorderly transition scenario.
Takahashi and Shino (2023) argue that the levels of scope 1 and 3 emissions have a negative
impact on lending for Japanese banks, but this was already visible before the Paris Agreement. They also
show that banks with greater leverage and a lower return on assets are more likely to decrease loans to
firms with high GHG emissions.

1.3.3 Banks supply of credit to green industries

Whereas only a few papers explicitly investigate the financing of green sectors, a slightly larger set of
papers considers the issue of financing the transition to low-GHG emission economies, taking into account
differences between advanced countries and developing countries.

1.3.3.1 Limited evidence on the financing of green sectors

Very few papers directly address the issue of financing green sectors.

12 The effects of climate change-related risks on banks: a literature review

 As mentioned above in 1.1.2 for lending spreads, Chava (2014) provides seminal analysis about
the impact of environmental concerns on loan availability in the syndicated loan market. Degryse et al.
(2023) use international syndicated loans to investigate whether banks create obstacles to the transition
given the legacy of brown loans. They actually show that it is not the case for green firms which receive a
lower spread on loan volume when the lender consortium can also be classified as green, especially after
the Paris Agreement.
Accetturo et al. (2022) measure the ability of banks to finance the green transition in Italy by
estimating the likelihood of firms to start green projects conditional on bank lending. This leads eventually
to a less risky bank portfolio. However, the approach raises the issue of the implications of such findings
regarding the broader and more relevant issue of financing the transition.

1.3.3.2 Impact of commitment

The impact of bank commitments in favor of the transition is mixed.
Ehlers et al. (2022), writing on syndicated loans, conclude that self-identified green banks may
lend less to high carbon emitters.
Kacperczyk and Peydró (2021) measure a cut in bank lending after banks’ commitment to reduce
GHGs, but no effect on brown firms’ environmental score.
Mesonnier (2021) shows that lending to small and medium-sized enterprises across more or less
carbon-intensive industries is unaffected by banks’ commitment to green their portfolio.

1.3.3.4 Ability to finance the transition

Offering the proper funding for the energy and climate transition is a difficult issue to address empirically.
Mueller and Sfrappini (2022) show that European banks extend their exposure to “green”
corporates after the Paris Agreement and this might turn out beneficial with a future environmental-
friendly regulation. This is not the case for U.S. banks which appear to create an obstacle to the transition.
Banks lend relatively more to firms that are likely to lose from future regulation. The authors find “no
evidence that lending in the United States is directed to firms that have a higher likelihood of transition;
moreover, low-capitalized banks exploit lending to this group of firms to boost profits”. In contrast, for
Europe, they conclude that “banks shift credit supply to European firms that consider themselves likely to
benefit from future regulation; hence, banks’ credit allocation seems to facilitate the transformation of the
economy”. Nevertheless, they also study the effect of banks’ indirect exposure via their loan portfolios and
find that “banks’ exposure appears to be a hindering factor in Europe: larger exposures to brown sectors
limit the transition”.
Interestingly, Cohen et al. (2020) find that oil, gas, and energy firms are particularly important in
the production of green assets, complicating questions about the funding of the low carbon economy.

1.3.3.5 Green washing or regulatory arbitrage

Regulatory arbitrage in response to climate change policy may take different forms.
Several studies point to the role of cross border lending and regulatory arbitrage in response to
a tightening of the regulation: Benincasa, Kabas and Ongena (2021); Laeven and Popov (2023).
Captive banks belonging to car manufacturers may face wrong incentives in the face of a
tightening of regulation on GHG emissions. Beyene et al. (2022) show that captive banks have stronger
incentives to support the manufacturer’s sales of high emission cars.
Gianetti et al. (2023), analyzing euro area banks, conclude that banks with extensive
environmental disclosure lend more to brown borrowers. Furthermore, this is not offset by lending to
green projects or financing the transition. However, banks are less likely to start new lending relationships

The effects of climate change-related risks on banks: a literature review 13

with brown companies. The divergence between green commitments and lending appears to be higher
for low capitalized banks.

Box 2

Insurance markets and climate risk

A healthy insurance industry could play an important role in mitigating the impact of climate events on financial
systems and economies globally; however, the natural response of insurers to growing physical risks from climate
change is to reprice insurance coverage or reduce its availability, leading to larger insurance protection gaps. Financial
sector supervisors are aware of this and have taken actions in at least two ways. One way is to help ensure that
insurance companies manage climate risks well, to protect policy holders and support financial stability (see, for
example, Cleary et al. (2019)). A second way is that insurance companies are sometimes included in the climate stress
tests financial sector supervisors run to assess the impact of climate change-related risks on financial systems (see
Box 3 on climate stress tests). One potentially important channel operating via insurance would be the increased risk
of mortgages held by banks if residential and commercial properties, which serve as collateral, become less insurable
against natural hazards. A second potentially important channel is the reduced availability of business continuity
insurance. Growing insurance protection gaps in these two areas could threaten financial stability.

Insurance can mitigate the effect of climate related disasters

Climate physical risks can of course have a direct impact on economies and financial systems, and ECB (2023) argues
that catastrophe insurance is a key tool to mitigate macroeconomic losses following extreme climate-related events,
as it provides prompt funding for reconstruction and should incentivize risk reduction and adaptation. Rousová et al.
(2023) suggest that if a large disaster of 1% of GDP hits a country, GDP growth declines by 0.24 percentage points in
the quarter of impact. However, if 25% of the losses are insured, the GDP growth rate is estimated to only decline by
around 0.15 percentage points. For unusually high shares of insured losses – e.g., a 75% insured share corresponding
to the 90th percentile of the distribution – the empirical model even suggests an almost immediate (within quarter)
rebound in GDP growth.

Climate change can make it more difficult to price insurance

Insurance only exists if the risks to be insured can be priced correctly and transferred to reinsurance companies and
to the capital market. Charpentier (2007) argues that “[i]t is extremely difficult to insure in a changing environment”.
In his view, climate risk – and more specifically natural disasters – is a challenging issue for the insurance industry,
since it involves the possibility of extremely large losses. He concludes that involving reinsurance markets and
insurance linked securities seems one solution to avoid insolvency problems. But climate is changing fast, and if this
uncertainty cannot be reduced, it might lead to challenges in the availability, pricing and affordability of insurance.

Some markets already see sharp increases in the price of home ownership insurance due to potential climate
related hazards. Keys (2023) reports that while the average price of home insurance in the United States is $1,900, the
price in New Orleans is $4,000 and the price in Miami $5,000 per year. If a price cannot be set, insurance coverage
may be incomplete, possibly triggering non-linearities when the natural disasters go beyond initial basic coverage and
governments do not step in. ECB (2023) documents a large insurance protection gap, especially in southern and
Eastern Europe. Only about a quarter of climate-related catastrophe losses are currently insured in the European
Union.

Oh et al. (2022) provide evidence that price regulation might cause a decoupling of insurance rates from
the underlying risks. In the U.S. states where price regulations appear most restrictive, rates are least reflective of risks.
In these high friction states, insurers are restricted in their ability to change rates in response to losses. As a result,
rates have not adequately adjusted in response to growth in losses. To overcome these frictions, insurers cross-
subsidize high friction states by raising rates in low friction states.

If climate change triggers an increase in the frequency of natural disasters, this can have significant impacts
on insurance, potentially increasing the risk of insurance companies not being able to cover their liabilities. Gray (2021)
argues that extreme weather has begun to diverge from historical records. Firms using models based on historical
data have struggled to integrate new information about climate change and climate variability into their forecasts.

14 The effects of climate change-related risks on banks: a literature review

 Hadzilacos et al. (2021) find that most insurance models assume events to be uncorrelated. If extreme events are
correlated, expected maximum pay-outs might increase substantially. They find a positive correlation of 20–40%.
Ntelekos et al. (2018) find that U.S. hurricanes tend to cluster. In a year when two or more Group 3 major hurricanes
occur, they estimate that there is around a 50% chance that they will occur within two weeks of each other.

Insurance-linked securities provide a protection against natural disasters

Insurance-linked bonds are paid if an event occurs. Polacek (2018) discusses CAT bonds. Catastrophe (CAT) bonds
have been provided since 1997. Unlike traditional insurance, CAT bonds are 100% collateralized. CAT bonds are also
structured to eliminate counterparty risk. CAT bonds have an appeal to investors as their returns are largely
uncorrelated with the returns of other financial market instruments. In the past, CAT bonds have provided strong
returns. This has helped attract alternative sources of capital into insurance markets.

Insurance-linked bonds can also be used as protection against negative weather events. Such bonds will
normally be index-based. A literature study by Kraehnert et al. (2021) finds that the CAT bond market has become a
vital pillar of the risk management of insurers. Weather derivatives, on the other hand, still seem to be a niche product
outside the United States. One challenge with insurance-linked securities is that there are economies of scale and
therefore easier for larger companies to use these tools than for smaller ones. With risk-based premiums one needs
to monitor the potential unaffordability of insurance. This will especially be the case if the less affluent tend to locate
in high-risk areas.

Index-based insurance might be a solution for the agricultural sector, but so far uptake is low

Index-based insurance has been used to protect farmers against negative outcomes. With index-based insurance pay-
outs depend on an index that strongly correlates with losses in income or assets. Kraehnert et al. (2021) argue that
index insurance especially can welfare-enhancing effects in developing countries. However, uptake rates so far remain
low despite the use of subsidies through vouchers or premium reductions. One reason for the low uptake might be
low levels of trust in the insurance provider. Individuals might also have difficulties assessing the probability that a
natural disaster will strike and therefore have problems understanding when the index-based insurance will be
triggered.

Citino et al. (2021), looking at agricultural insurance in Italy, also document a low uptake of insurance. They
find that adverse selection and choice frictions render price mechanisms like subsidies less effective. Instead, one
should consider mandates to assure a greater insurance coverage.

Low uptake of flood insurance

Kraehnert et al. (2021) find that in markets with voluntary flood insurance uptake is low, typically below 50%. Low-
probability, high-impact events are often underestimated by economic agents. Large-scale information campaigns on
flood risks and insurance possibilities have been ineffective so far. Another issue is moral hazard, as individuals might
expect government relief in response to a large amount of uninsured losses. This might help explain the finding of
Kousky et al. (2020a) that most households are uninsured or underinsured against floods, despite flooding being the
most frequent and costliest natural disaster in the United States. Of course, any expectation on the part of households
that government agencies will provide sufficient post-flood assistance could be, in the event, incorrect.

In the Netherlands flood insurance is not even available, as the government is responsible for providing
flood relief. Botzen and Van den Bergh (2008) examine existing risk-sharing arrangements and the possible role of
private insurance in some detail. They argue that private insurance has a role in spreading risk and raising incentives
to reduce economic losses.

Mandatory insurance coverage schemes

Public-private initiatives can be used to increase insurance coverage against natural disasters. European Central Bank
(2023) suggests that public-private partnerships (PPPs) and ex ante public backstops can be suitable safeguards and
give incentives to promote risk mitigation. This might be necessary to ensure broad insurance coverage. Gray (2021)
points out that how to incorporate knowledge about climate impacts into routine economic processes, such as
insurance pricing, can trigger broader political disputes about how these risks should be socially distributed.

The effects of climate change-related risks on banks: a literature review 15

 There is a trade-off between actuarial fairness and social solidarity in public–private mixed insurance
schemes. Mandatory schemes reflect the principle that natural disasters are hard to predict and therefore offer wide
coverage for moderate premiums to all. Owen and Noy (2019) look at payments after an earthquake in New Zealand
and find that payments from the system are highly regressive. They find that the poor are subsidizing the rich. They
suggest a simple shift from effectively flat premiums to a set percentage of the total private sum insured. Charpentier
et al. (2021) look at the French system for flood insurance. Historically, the system was meant to give protection to the
worst off. However, experience accumulated over past decades now makes it possible to assess physical risks that
previously were not well understood. Flood losses, long considered uninsurable, is one example. In the current
situation well-off properties might be the main beneficiaries of the natural disaster compensation scheme.

Part 2: Sector-specific channels of transmission

2.1 Climate impact on the pricing of property

We now consider the issue of the impact of climate change on real estate prices. Property is the most
important source of collateral in the banking system. Buildings are also a major source for energy use, and
they are highly vulnerable to many of the consequences of climate change – like increased risk of flooding,
rising sea levels and more frequent extreme weather events. Property exposed to climate risk can be a
major contributor to volatility in the financial system. At the same time, many of the risks are to some
extent foreseeable, and with proper risk assessment banks can reduce exposure to climate risk significantly.
The transmission to banks obviously depends on the nature of the loan contract (whether it is a
recourse or a non-recourse loan), which depends on the jurisdiction, but to our knowledge this dimension
has so far not been fully investigated. It also depends on the existence of insurance guarantees (see Box 2).
A large literature has evolved on how climate related effects might affect property. The literature
looks at possible price effects, with implications for collateral values. It also looks at how credit quality is
related to exposure to different climate related issues. We will first discuss the substantial literature on
physical risk and then look at the smaller literature on transition risk, especially related to energy efficiency.

2.1.1 Effects of physical risks

Property is directly exposed to acute physical risk associated with climate change. A fall in collateral values
can affect banks both directly through increased losses and indirectly through less market growth or higher
financing costs due to lower collateral values.
Acute physical risks are hazards that can become more frequent with rising global temperatures.
The most common examples are rising maximum tide levels due to sea level rise (SLR), higher probability
of floods due to periods with extreme rainfall and higher exposure to forest fires due to periods with heat
waves and drought. In addition, some regions might see a higher frequency of storms.
In OECD countries, many such risks tend to be well known and mapped by authorities. It is
possible to identify if a building is in a risk zone or not. However, the awareness of this information has
been slow to disseminate in some regions. So far, most papers have investigated the effect of flood risk
and rising sea levels, as these are the risks best documented. Some event studies look at the effect of
hurricanes and storms.
The countries most exposed to acute physical risks are probably outside the OECD. These
countries tend to have less resources to prevent damage or to map potential risk zones. However, with a
few exceptions the papers reviewed only cover industrialized countries.

16 The effects of climate change-related risks on banks: a literature review

2.1.1.1 Price effects of exposure to flood risk
A large literature has evolved on the question of price effects for property exposed to flood risk and SLR.
Flood risk can either arise because the building is on a flood plain or at the coast and exposed to higher
probability of water damage with rising sea levels. The results are summarized in Figure 4.
Many papers find that properties in potential flood areas sell at a discount. Baldauf et al. (2020)
and Bernstein et al. (2019) find that “homes exposed to SLR sell for approximately 7% less than observably
equivalent unexposed properties equidistant from the beach”. Keys and Mulder (2020) find that for
exposed properties in Florida transaction volumes declined 16–20% from 2018–2020 while prices declined
5%. Mirone and Poeschel (2021), looking at Demark, find that properties with expected future flood risk
sell at a 3–4% discount. The discount for flood risk tends to increase after flooding events. Fuerst and
Warren-Myers (2021) find a discount between 1 and 3% for properties and between 2 and 5% discount in
land value in a flood risk area identified through the statutory authority planning overlays, looking at
floodplains and SLR from Melbourne, Australia. Reeken and Phlippen (2022) find a more modest negative
price effect of 2.5% in the Netherlands, but the paper notes a number of methodological issues identifying
comparable properties. Giglio et al. (2021a) argue that flooded areas may indeed benefit from a premium,
due to various amenities.
Beltrán et al. (2018), in a meta-analysis, find that “for inland flooding the price discount associated
with location in the 100-year floodplain is -4.6% in the United States”. Hino and Burke (2020) estimate that
full pricing of presence in a floodplain in the United States should reduce property values by 5.1% to
10.7%. Garbarino and Guin (2021) look at how lenders react after a flood event, using U.K. data. Properties
in flooded areas decrease in selling price between 2.6 and 4.2%.
It should be noted that some papers also find smaller effects. Murfin and Spiegel (2020) find no
price effect. They put forward two plausible interpretations of this finding. One is that home buyers have
a limited understanding of relative SLR risk. The other is that homebuyers have sophisticated expectations
of relative SLR risk but believe mitigation efforts will be largely successful. Bakkensen and Barrage (2021)
find that prices are not always adjusted for risk and argue that that coastal prices in Rhode Island exceed
fundamentals by 6–13%.

The effects of climate change-related risks on banks: a literature review 17

Estimated discount or overvaluation of house prices in high flood risk area
12 studies Figure 4

0
0 % to 3 % 4 % to 5 % 5 % to 10 % 10 % to 13 %

Observed price discounted Estimated overvaluation

Source: authors’ calculations, based on the review of 9 papers in the academic literature, number of studies (vertical axis) providing an estimate
of the impact of exposure to flood risk for property valuation. Studies finding an observed price discount in blue, studies indicating an
estimated overvaluation due to lack of valuation of flood risk in red. Studies included: Bakkensen and Barrage (2021), Baldauf et al. (2020),
Beltrán et al. (2018), Bernstein et al. (2019), Fuerst and Warren-Myers (2021), Garbarino and Guin (2021), Giglio et al. (2021a), Hino and Burke
(2020), Keys and Mulder (2020), Mirone and Poeschel (2021), Murfin and Spiegel (2020), Reeken and Phlippen (2022).

2.1.1.2 Perception and information is important for price impact

Many papers note that perceptions of risk can differ across locations, and that this can have a major impact
on the price effect. Keys and Mulder (2020) find that sellers remain optimistic about the value of exposed
property, while buyers are more and more suspicious. As a result, as is typical in case of adverse selection,
volumes fall before prices begin to fall. Bakkensen and Barrage (2021) argue that belief heterogeneity can
reconcile prior mixed evidence on flood risk capitalization. Bernstein et al. (2019) find that the discount
has grown over time and is driven by sophisticated buyers and communities worried about global
warming.
Information dissemination is also important. Baldauf et al. (2020), as well as Hino and Burke
(2020), find that “the price penalty for flood risk is larger for commercial buyers and in states where sellers
must disclose information about flood risk to potential buyers”. This suggests that policies to improve risk
communication could influence market outcomes.
Gourevich et al. (2023) present a broad study of flood risk across the United States. They argue
that there is a “housing bubble by unpriced flood risk”. Overpriced properties are concentrated along the
coast, in areas with no flood risk disclosure laws and less concern about climate change. Overvaluation is
especially widespread among low-income households. They estimate that U.S. residential properties are
overvalued between USD 121–USD 237 billion, depending on the choice of discount rate (hence an
average overvaluation of 0.5%, according to estimates based on data from the real estate company Zillow;
total US residential value in 2021 was around USD 36.2 trillion).

18 The effects of climate change-related risks on banks: a literature review

2.1.1.3 Price effects of natural disasters
Another strand of the literature looks at how property prices are affected by natural disasters. While flood
risk is a potentially recurring event, a natural disaster could be interpreted as a one off.
Often houses are built back better, making comparison of prices before and after difficult. Instead,
the risk of future disasters might affect demography and housing supply. Zivin et al. (2020), using a detailed
data set with housing characteristics from Florida, find that usually supply falls after a hurricane, but
demand seems unaffected. This induces an increase in equilibrium prices and a decrease in transactions
in affected areas, both lasting up to three years. The authors control for property characteristics,
seasonality and differential economic growth across counties. As a result, incoming homebuyers during
recovery have higher income, conditional on the characteristics of transacted homes, resulting in an
enduring increase in the distribution of income.
Similarly, Apergis (2020), in a study that covers 117 countries from 2000–2018, finds floods cause
an immediate fall in prices, but prices recover as repairs are completed. Only when floods occur very
frequently do they find a permanent impact on prices, as there is no time to conduct full repairs. In a
similar pattern, Kivedal (2023) uses payments from the Norwegian natural disaster insurance pool to
identify exposed properties. The paper finds a positive effect in the short run for flood surges and damages
related to extreme weather, indicating creative destruction in that homes are rebuilt with a higher quality
than previously.
Clayton et al. (2021), survey the literature on effects on commercial real estate (CRE). The drop in
prices after climate events has been modest and short-lived in locations that historically have been most
exposed to extreme weather events like flooding and hurricanes. In such areas climate risk might already
be capitalized into property values. However, some recent evidence finds that an increase in the frequency
of climate related risks can lead to a long-lasting decline in CRE prices or reduce market liquidity. It can
be reasonable to see this as a correction to previous under-acceptance or under-awareness of risk.
Rodríguez et al. (2023) look at a special case of ecological deterioration. A beach area in Spain
located at a saltwater lagoon has since 2015 been struck by increased algal bloom. The authors find that
in the 6 years after 2015 return on housing in the affected area was 43 percent lower than in similar
neighborhoods outside the affected lagoon, indicating that environmental degradation can have large
effect on housing value.
Non-climate related events can have a larger effect than climate-related events. Apergis (2020)
highlights that geological disasters exert the strongest (negative) impact on house prices. Kivedal (2023)
finds evidence of a negative effect on house prices from natural disasters at a longer horizon.

2.1.1.4 Investment in climate risk adaptation

The potential cost of future flooding raises the question of the social cost of adaptation. Hovekamp and
Wagner (2023) look at the possibility of elevating houses as a private defense against flooding.
Undertaking adaptation is socially optimal in the highest risk areas over a house’s lifetime, but individual
homeowners may underinvest in flood protection because the benefits do not accrue over their average
tenure. The wedge between the perceived private benefits and the social value of adaptation is
exacerbated by any undervaluation of flood protection while living on the coast, and the full benefits of
adaptation also are not internalized by homeowners purchasing better than actuarially fair public flood
insurance. The results underline the importance of public standards for new construction to ensure that
minimum elevation standards are met in order to encourage efficient outcomes in areas at high risk of
catastrophic flooding.
Benetton et al. (2022) look at the sea wall constructed around Venice to provide new evidence
on the capitalization of infrastructure investment in climate change adaptation into housing values. They
exploit the quasi-experimental temporal discontinuity in the exposure to sea floods from the first

The effects of climate change-related risks on banks: a literature review 19

activation of the sea wall. They find that the sea wall increased house prices by 3% for properties above
the sea wall activation threshold and by an additional 7% for ground-floor properties. Overall, one year
after its inception, the sea wall generated an estimated 4.5% increase in the value of the total residential
housing stock in Venice, which is a lower bound of the total welfare gains potentially generated by this
infrastructure.

Giglio et al. (2021a) look at the housing market to determine appropriate discount rates for
valuing investments in climate change abatements. The paper seeks to identify a term structure of discount
rates for real estate over a horizon of hundreds of years – the horizon most relevant for investments in
climate change abatements. Looking at data from the U.S. East Coast, they identify climate risk by linking
geo-code addresses to identify properties that will be flooded with a six feet increase in sea levels. They
find that if real estate is affected by climate risk the real estates’ term structure of discount rates is
downward sloping and reaches 2.6% for payoffs beyond 100 years.
Clayton et al. (2021) find that good governance and public investments might abate negative
price effects and help explain the modest and short-term nature of price reductions. On the other side,
lack of governance or proactive investment may be harming prices. There is some evidence that investors
put higher risk premiums on properties in areas exposed to negative climate events. This is regardless of
whether their individual properties have been directly affected. This might even extend to areas with similar
climate risk profiles, where events have yet to occur. On the other hand, there is so far little evidence that
owners’ investment in resilience improves financial performance or insurance pricing on the asset level.

2.1.2 Transition risk to property prices

Building accounts for about 40% of Europe’s total energy consumption (Zancanella et al., 2018). Heating
of homes made up over 60% of households’ total energy use in the European Union in 2020 (Eurostat,
2022). 8 Median housing-related energy costs accounted for 7.2% of a household’s weekly expenditure in
Great Britain (Griffiths et al., 2015). Changing the sources of energy and making energy use in properties
more efficient, will be a major factor in the transition to a low carbon society. Energy transition might
increase energy prices. New requirements for energy efficiency will make it obligatory with investments
today but can reduce expected energy costs in the long run.
With more volatile energy prices, energy costs can become a major risk factor for both
households and commercial businesses. It is becoming increasingly clear that energy efficiency can reduce
the risks associated with a property investment. This is motivating increasing action by financial regulators
and governments to require banks to incorporate these factors into risk management and pricing
decisions.
For banks and other financial institutions, energy efficiency might be an indicator of lower
financial risk since the property has lower costs and a lower exposure to volatile energy prices. This should
be reflected in lending requirements.
Beyond the effects identified above of lending spreads on transition sensitive real estate assets
(see 1.1.2), energy-saving improvements have a direct price impact. Zancanella et al. (2018), doing a broad
literature review, find that residential assets tend to increase by 3–8% in price because of energy efficiency
improvements. For commercial buildings the premium seems higher, over 10% and in some studies even
over 20%. Rental prices of commercial real estate tend to increase by 2–5%. On the other hand, Ferentinos
et al. (2023) conclude that the implementation of the Minimum Energy Efficiency Standard (MEES) that
fined landlords in England and Wales if their rented properties did not meet minimum efficiency standard,
was rapidly incorporated into a lower price on affected houses and flats. However, the study suffers only

8
See Eurostat: Energy consumption in households - Statistics Explained (europa.eu).

20 The effects of climate change-related risks on banks: a literature review

provides a lower bound of the effect so that it is not possible to know the full extent of the decline in
house prices.

2.2 Climate impact on non-financial firms

Businesses face increasing regulatory and economic pressure to address their operational exposure to
physical and transition risk. This demand and their responses could affect their financial health and quality
as borrowers, their demand for credit, and their behavior as depositors. Therefore, the magnitude of
potential repercussions of physical hazards and regulatory shocks for borrowing firms is important to
understand from the perspective of banks and financial institutions.

2.2.1 Physical risk

When it comes to physical risks, many studies examine damages from the perspective of equity holders
as residual claimants. A common challenge for this type of research is the requirement of granular
information on firm locations. However, for competitive reasons and complicated production processes,
firms face incentives to keep their information on establishment locations private. Further, it is difficult to
measure indirect impacts on firms through their supplier networks in a world of limited supply-chain
transparency. For these reasons, existing studies estimate the effects of climate change-related hazards
across a subset of the universe of firm locations.
The literature on firms and physical risk is most developed related to temperatures. Somanathan
et al. (2021) study the effect of heat on the productivity of Indian firms. They find a sizeable negative effect
of heat on worker productivity as well as an increase in absenteeism. The estimates decrease with climate
control availability. In support of the importance of the labor channel in explaining the destructive effects
of heat, the authors find that that the estimates are large enough to explain observed cross-country output
losses. Related to this study, Li et al. (2016) find that export quantities of firms in China decrease with heat,
and Zhang et al. (2018) document that heat reduces the productivity of Chinese establishments. For firms
in the Ivory Coast, Traore and Foltz (2017) also find a negative link between heat and measures of firm
performance. In an international sample of over 90 firms, but excluding the United States, Pankratz et al.
(2019) find that hot days reduce revenues and operating income, with a one-standard-deviation increase
in the number of hot days decreasing operating income by 1.8% of the average quarterly value. In contrast,
Addoum et al. (2020) find no effects of abnormally high or low temperatures on establishment sales in the
United States, apart from a positive impact of low temperature on sales in the energy sector. Hong et al.
(2019) study droughts and document decreases in the profitability of firms in the food sector. Apart from
heat, Kruttli et al. (2021) study the effects of hurricanes and show that stock options on firms in the landfall
region show increases in implied volatility of 5–10%. Floods and storms have been implicitly studied using
aggregate data on natural disasters.
Despite the data limitations outlined above, a few papers investigate firms’ indirect exposure to
climate change-related hazards through supply chains. For example, Barrot and Sauvagnat (2016) find that
natural disasters at supplier locations in the United States impose substantial output losses on their
customers. The effects are pronounced when suppliers provide specific inputs. Pankratz and Schiller (2019)
study how heat and floods affect firms' financial performance and operational risk management in global
supply chains. They find that adverse weather at supplier locations reduced both the operating
performance of the directly affected suppliers and their remotely located customers. In addition, they
document that customers respond to increases in the exposure of their suppliers and are more likely to
terminate existing supplier relationships when the realized number of heat or flood days exceeds ex ante
expectations.
The documented effects on firms are economically relevant from the perspective of equity
holders. Lenders and bondholders, in contrast, may be less concerned about residual changes in firm value
due to their short investment horizon and liquidity preference. Potentially, shocks of moderate severity

The effects of climate change-related risks on banks: a literature review 21

could magnify and affect operations and creditworthiness if increasing frequencies limit companies’ access
to insurance. However, the evidence on the effect of physical risks on firms’ probability of default so far is
limited. As one exception, Xie (2017) finds that the exposure to heat may not only affect firm performance
but also the survival probability of firms in Indonesia.
Besides default risk, decreases in productivity and increases in uncertainty could affect firms’
demand for credit and volume of deposits. Related to the demand for bank credit, Ginglinger and Moreau
(2019) find that firms decrease their leverage when they face increased physical risk, which may be a sign
of lower loan demand.
When it comes to deposits, the existing evidence points in different directions. On the one hand,
the repercussions for firm performance documented by the aforementioned studies could thin out firms’
cash buffers and bank deposits. On the other hand, firms may respond to actual or perceived uncertainty
by increasing cash. For instance, Dessaint and Matray (2017) show that corporate managers increase cash
holdings when firms in neighboring countries are hit by hurricanes.

2.2.2 Transition risk

In addition to physical risk, regulatory pressure and transition risk could affect firms’ financial
health, demand for credit, and deposits. Recent studies examine the effects of climate policy on stock
prices and returns. For instance, Meng (2017) studies the failed attempt to pass a cap-and-trade climate
policy in the U.S. Senate and finds significant differences in the stock price reactions of affected and
exempted firms. Bartram et al. (2022) use a diff-in-diff analysis to document that financially constraints
firms shift emissions in other states following implementation of the Californian cap-and-trade system. Li
et al. (2020) conduct a textual analysis and find that firms facing high transition risk are valued at a
discount. Ramelli, Ossola, and Rancan (2021) document decreases in the stock prices of carbon-intensive
firms around the first global climate strike of 2015. They argue that the strike marked a turning point in
climate activism and find that the unanticipated success is also linked to analyst downgrades of firms'
long-term earnings projections. Further, public attention to climate activism appears to be a plausible
driving channel of these effects. Ramelli, Wagner, Zeckhauser, and Ziegler (2021) show that stock prices
move with expectations related to climate policy around the U.S. 2016 and 2020 Presidential elections.
Ochoa et al. (2022) study carbon taxes in Germany and find that the value of firms with low carbon
emissions increases compared to high carbon counterfactuals. Whereas these studies point to the
sensitivity of equity markets to transition risks, the potential consequences for default frequencies and
losses given default are studied less frequently.
Related to questions about the demand for credit from corporate borrowers in response to
climate policy and uncertainty, recent work suggests that affected borrowers may shift from public to
private sources of financing. Beyene et al. (2021) find that bond markets price the risk in fossil fuel firms,
whereas syndicated loan markets do not appear to respond. In line with this gap, they find evidence that
fossil fuel firms increasingly rely on syndicated loans instead of bonds.
Like the effects of physical risks, the uncertainty created by transition risks could affect the
preferences of non-financial firms for holding cash. While international evidence is scarce, two studies
point in this direction in China: Wu, Shih, Wang and Zhong (2023) document that carbon-intensive firms
increase cash holdings after the adoption of the Paris Agreement. Further, Yuan and Gao (2022) find that
firms increase their cash holdings with the enforcement of green credit guidelines.

2.3 Climate impact on government bonds

Understanding the extent to which climate risk is priced into government bonds (including those issued
by central governments and local governments) is important to assess banks’ exposure to climate risk. This
is because government bonds often account for a non-negligible share in banks’ holdings of securities.

22 The effects of climate change-related risks on banks: a literature review

 Climate risks, both physical and transition risks, can affect sovereign risk mainly through the
following three channels (Volz et al., 2020; and Zenios, 2021).
Fiscal channel: climate risk is likely to increase governments’ debt burden. For physical risk, natural
disasters may damage government assets and public infrastructures, increasing public expenditure. Also,
natural disasters are likely to disrupt economic activity, lowering tax income and other public revenues
and increasing social transfer payments. As regards transition risk, adaptation and mitigation policies in
response to the challenges that climate change poses require large government investments. 9 In addition
governments may lose the tax revenues from oil consumption, if the economy decarbonizes.
Macroeconomic channel: climate risk, especially physical risk, is likely to adversely affect both
supply and demand sides of the economy. Extreme weather events and global warming may reduce supply
by damaging the capital stock and reducing investment and consumption by weakening balance sheets
of corporates and households. 10
Financial stability channel: climate risk would decrease financial stability. Both physical and
transition risks would manifest as credit risk for banks, reduce insurers’ margins due to higher insurance
claims and trigger repricing of certain, especially “stranded”, assets.
Several studies look into the pricing of climate risk in government bond yields. Their findings
generally suggest that higher climate risk comes with more expensive borrowing costs for governments.
A few papers focus on physical risks. Mallucci (2020) finds that extreme weather restricts a country’s access
to financial markets. While a clause that allows governments to suspend payments when extreme weather
hits can allow governments to borrow more, spreads increase 40% to compensate investors for the risk
that governments activate the disaster clause (based on Caribbean countries’ data). Bowman et al. (2022)
propose an approach to assess climate change’s impact on sovereign bonds with outputs from climate
models reviewed by the Intergovernmental Panel for Climate Change. Then, they consider their economic
impacts from the literature and use those as overlays in a pricing model for sovereign bonds. Their
estimates suggest that, under the RCP 4.5 mean scenario, the impact on G20 countries’ sovereign spreads
ranges from close to 0 to 20 basis points, with a bigger impact on poorer countries. Goldsmith-Pinkham
(2021) and Acharya et al. (2022) examine how physical risks affect U.S. municipal bonds (see 1.1.1). Cevik
and Jalles (2020)’s estimates suggest a 233 bp spread between the top and bottom quantile of countries
ranked by climate vulnerability. The economic and statistical significance of these effects are much greater
in developing countries with weaker capacity to adapt to, and mitigate the consequences of, climate
change. Beirne et al. (2021) find that the premium on sovereign bond yields due to climate risk amounts
to around 113 basis points for EMEs overall. In contrast, exposure to climate risk is not statistically
significant for advanced economies overall.

Part 3: Aggregate and macro-economic effects

To assess the impact of climate related shocks on banks, it is also important to consider the overall effects
on individual banks, the aggregate effect on the whole banking system, with possible spillovers across
banks, as well as the macroeconomic environment, together with feedback effects (see also European
Systemic Risk Board, 2021 and 2022).

9
That said, a low-carbon transition can also have some positive impacts on fiscal space. For example, the transition could
generate significant public savings from phasing out fossil fuel subsidies. For another example, governments could generate
substantial revenue from carbon taxes.
10
In the long run, gradual global warming and transition policies have important implications for growth potential by causing
fundamental and enduring structural changes to the economy.

The effects of climate change-related risks on banks: a literature review 23

 Note that the review does not cover the aggregate effect on banks in the case a climate event
comes through the liquidity channel. Acharya et al. (2023), reviewing the literature, find some papers that
document that climate events can cause deposit withdrawals as well as increased demand for loans. See
in particular Brei et al. (2019). However, compared to other channels, they argue that the liquidity risk
channel of climate risk has been relatively understudied. Further, they find no paper that has studied the
effect of transition climate risk on banks through the liquidity risk channel.

3.1. Aggregate effect on banks

Beyond the effect of climate change on individual portfolios and specific risk, it is important to get a
comprehensive view of the overall effect of these different channels on the situation of banks and notably
on their profitability. From that perspective, Pagliari (2023) focuses on flood risks and exploits the
peculiarities of business models for small European banks to proxy for the location of the banks’
counterparties. She finds that “ROA has been on average lower at banks located in areas that have been
historically subjected to severe flooding events”. This is partially due to what she identifies as the “core
lending channel of transmission”, whereby flood risks can hinder banks’ profitability via the decrease in
lending to households and non-financial companies. Similarly, Schubert (2023) finds that, in the cross-
section of stock returns, small banks with high exposure to flood risk underperform other banks, on
average, by up to 8.7% per year. Blickle et al. (2022), on the other hand, find that FEMA disasters over the
last twenty-five years had insignificant or small effects on U.S. banks’ performance. They highlight that
disasters increase loan demand, which offsets losses and boosts profits over the medium run at larger
(multi-county) banks. This is consistent with Cortés and Strahan (2017) who show that banks reallocate
credit from less exposed to more exposed areas.

3.2 Effects on the overall banking system, in particular through the lens of stress
tests

The second dimension is the effect of climate change on the banking system as a whole, as opposed to
individual banks, and how it interacts with macroeconomic developments.
Bottom-up stress tests provide information on the aggregate effects of climate change-related
shocks. There is also limited evidence for non-linearities at the aggregate level. However, research is active
to assess second-round effects.

3.2.1 Bottom-up stress tests

The results of climate change-related stress tests run by banks on the basis of scenarios provided by
supervisors indicate that the risks are significant, but banks have the capabilities to withstand the shock.
For the euro area, the European Central Bank (2022) conducted a constrained bottom-up climate risk stress
test in 2022. Based on modified NGFS scenarios, banks assessed the impact of transition and physical risks
on corporate exposures and exposures secured by real estate. The results showed that banks are to a
varying degree exposed to the materialization of physical risks. Taking the impact of physical and transition
risks together, the projections of 41 banks indicate a loss of around 70 bn EUR for the analyzed scenarios.
These additional provisions correspond to around one third of the total exposure of participating banks
and the amount is highly likely to underestimate the impact of climate risk due to numerous additional
reasons, e.g., moderate scenarios compared to conventional stress scenarios and data and modeling
techniques that are at a preliminary stage. (See Box 3 on climate stress tests for a discussion of some of
the challenges facing climate stress tests and also some of the limitations of the exercises.)

24 The effects of climate change-related risks on banks: a literature review

3.2.2 There is limited evidence of non-linearities at the aggregate level
There is currently only limited information regarding possible non-linearities (as well as contagion effects
discussed in the next section). But it is very likely that we underestimate the risk.
Danielsson (2020), looking at Swedish data, finds that the number of coastal homes below 2
meters above sea level is small. This can be interpreted as showing that the risk of flooding was considered
when the housing was built. The low number of homes on these low levels may thus partly be due to the
risk of flooding being high if a house is too close to sea level; it is safer to build houses at a higher point
above sea level. The rapid increase in the number of owner-occupied and tenant-owned homes at 2–3
meters above sea level also means that, should the sea level rise much, even more housing will be exposed
to the risk of flooding, as significantly more housing is situated 2.5–3 meters above present sea level than
at levels of up to 2 meters.
Caloia and Jansen (2021) do a reverse stress test of how a flooding event in the Netherlands
might affect Dutch banks. They find that the Dutch banking system is well capitalized to withstand floods
in unprotected areas, with little real estate, as this will have a negligible effect on banks’ capital. However,
a major flooding event affecting densely populated areas might have a significant effect on bank capital.
They estimate that a major flooding event might cause a 10% fall in GDP, and a possible impact of up to
700 basis points on bank capital. It should be noted that these scenarios are very much in the tail of the
distribution. However, the study shows that the cost of not mitigating climate change in an effective
manner can potentially be very costly.
In addition, the existence of “tipping points” with the breach of biophysical thresholds (like the
loss of the Greenland ice sheet), with irreversible effects on climate change, would have considerable
effects on the overall banking system. As described by Bolton et al. (2020), “green swan” events may trigger
non-linearities and have far reaching consequences on banks, including profitability and charter value. A
new emerging literature considers the increasing likelihood of the simultaneous breach of several tipping
points.

3.2.3 Research is active to assess second-round effects of climate change-related shocks

There is a substantial literature on the existence of second-round effects of climate change-related shocks,
in particular from the stress testing literature, as the financial system may amplify initial climate shocks,
notably through uncertainty channels.
Battiston et al. (2017) show in their climate stress test for the 50 largest EU banks that second-
round effects can be of comparable magnitude to first-round effects. In their analysis, second-round
effects are in particular the consequences of fire sales, triggering a fall in asset prices, which affects the
value of the portfolio of banks, leading to an even larger sell-off. De facto, some analyzed banks only
experienced second-round losses and only marginal first-round losses.
Even if they do not focus on climate change, Ahnert and Georg (2018) find that, when banks are
subject to common exposure, information contagion increases systemic risk. Aldasoro et al. (2017),
studying a network model of the interbank market, show that contagion occurs through interbank
interlinkages, fire sales and liquidity hoarding. Extending such analysis to climate change-related shocks
is a relevant issue for future research.
Indeed, the exposure to common asset classes of different market participants,
interdependencies among financial institutions, and potential fire-sale dynamics could amplify the impact
of climate risks on banks.
For instance, Roncoroni et al. (2021a) study how the structure of a financial network and market
conditions affect financial stability in the European banking system. They detect two channels of financial
contagion: i) direct interconnectedness, via a network of interbank loans, bank loans to non-financial
corporates and retail clients, and security holdings; and ii) indirect interconnectedness, via overlapping

The effects of climate change-related risks on banks: a literature review 25

exposures to common asset classes. They uncover a strongly nonlinear relationship between diversification
of exposures (distinguishing whether it takes place vis-à-vis the real or the financial sector 11), shock size,
and losses due to interbank contagion. They also demonstrate the potential for contagion effects to
amplify first-round stress test results due to interconnectedness.
Roncoroni et al. (2021b) analyze the effects on financial stability of the interplay between climate
transition risk and market conditions. To this end, they extend in a novel way the framework of the climate
stress test of the financial system by including an ex ante network valuation of financial assets (that
accounts for asset price volatility as well as for endogenous recovery rate on interbank assets). Moreover,
as in the previous paper, they consider the dynamics of indirect contagion of banks and investment funds,
which are key players in the low carbon transition, via exposures to the same asset classes. More precisely,
the methodology combines the estimation of losses arising both from interbank distress contagion, as
well as from common asset exposures.
In other words, they identify conditions under which total losses of the financial system are large,
even if the direct exposure to shocks is small. They also show that the combination of distress contagion
and common exposure contagion gives rises to losses that are larger than the sum of individual
contributions. This result naturally reminds us of the distinctive features of climate change risks. Indeed,
physical and transition risks may trigger complex, non-linear chain-reaction effects with associated tipping
points and irreversible impacts (see Bolton et al. (2020) for further details).
• Jourde and Moreau (2023) propose a market-based framework to study systemic climate risks
in the financial sector. More precisely, they propose a test procedure to assess whether climate
risks can exacerbate contagion effects among financial institutions, which is a key element to
assess the level of systemic risk in the financial sector (e.g., Billio et al. (2012)). More precisely,
the proposed procedure is based on the following steps:
• First, using a GARCH model, they estimate time-varying Value-at-Risk (VaR) from the stock
returns of financial institutions of interest. Then, from the estimated correlation matrix of those
individual measures of tail risk (relevant for financial stability), they extract the first principal
component, namely an indicator of systemic tail risk dependence within the financial sector.
• Second, they construct climate risk factors, distinguishing between transition and physical risks,
and they estimate associated VaR measures.
• Third, building upon the previous steps, they propose a two-pass regression procedure to assess
whether climate risks can exacerbate tail risk dependence among financial institutions. First, they
run a time-series regression to verify if an increase in climate risks is associated with a
contemporaneous increase in downside risk within the financial sector. Then, they perform a
cross-sectional regression to test if the financial institutions most exposed to climate risks have
stronger tail dependence with the rest of the financial sector.
• Fourth, they investigate the characteristics of the financial institutions that correlate with
individual climate risk exposure.
They apply their framework to large European financial institutions, observed between 2005 and
2022, and show that: i) exposure to transition risk has increased since 2015, mainly for banks and life and
non-life insurance companies; and ii) unlike physical risk, transition risk can exacerbate tail dependence
among financial institutions and, thus, significantly influence systemic risk.
In other words, there is a clear need to integrate the contributions of second-round effects of the
initial climate change-like shock induced by the contagion channels characterizing a banking system.
Belloni, Kuik, and Mingarelli (2022) assess the effects of changes in carbon prices on the European banking

11
In their analysis, diversification within the financial sector is less likely to reduce systemic risk.

26 The effects of climate change-related risks on banks: a literature review

system by means of four contagion channels (real economy credit risk, interbank credit risk, liquidity risk,
and market risk). They find that the European banking system may be facing substantial risks only in cases
of high and abrupt changes in carbon prices, if emissions are unchanged. The paper also finds that large
increases in carbon prices might still entail tail risks for the banking system if firms reduce emissions only
slightly.

Box 3

Issues raised by evidence from stress tests

Financial sector supervisors are aware that there is the possibility that financial institutions will underestimate risks
from climate change and that this poses a threat to financial stability. To date, the main response of financial sector
supervisors has been the development of stress tests for climate change for macroprudential and microprudential
purposes (see, e. g. Vermeulen et al, 2021, for a top-down transition stress test for the Netherlands). These exercises
are different from traditional stress tests in a number of ways. Baudino and Svoronos (2021) discuss the main features
of several early stress tests for climate change, which are also shared by more recent climate stress tests. It is
recognized that climate stress tests are in a very early stage of development. Nevertheless, novel approaches to assess
climate risk in stress tests are developed continuously. In particular, Jung, Engle and Berner (2023) compute banks’
expected shortfall or CRISK, similar to Brownlees and Engle’s (2017) SRISK. Such a market-based approach allows one
to analyze large global banks’ vulnerability, measuring the impact of disorderly stress scenarios, including a stranded
asset factor (*). There is thus considerable uncertainty about the outcomes of these exercises, in part because of their
early stage of development but also because of the inherent uncertainty of climate change risks and the long time
horizons of the exercises. Because of this greater uncertainty, it is fairly common for climate stress tests to involve the
running of more scenarios than traditional stress tests (see, for instance, Allen et al. (2020) and Emambakhsh et al.
(2023)). The results for individual financial institutions also tend not to be disclosed, given that the exercises are in an
early stage of development. Another key difference is that, to date, the quantitat3ive output of stress tests for climate
change have not been used to determine capital requirements for climate risks, although qualitative results may
sometimes have an impact on (bank-specific) Pillar 2 requirements (P2R in the European Single Supervisory
Mechanism).

It is recognized that climate stress tests have general limitations, even if they are nevertheless viewed as
useful risk management exercises. Indeed, there are general limitations to any quantification due to the lack of
appropriate data. As mentioned in the main text, this creates the potential to underestimate the risks that climate
change poses to financial institutions. This is true for a number of reasons. Firstly, climate physical and transition risks
are mostly absent from past data, while most risk management techniques rely heavily on risk realizations in past data
to measure future risks. Secondly, granular data is needed to properly assess risks from climate change, and financial
institutions often do not have this data. Thirdly, it is also generally agreed that in times of economic stress correlations
diverge from regular, non-stressed periods, although as observed by Forbes and Rigobon (1999) as well as Loretan
and English (2000) care must be taken when measuring correlations during times of high volatility because there is a
mechanical effect of rising volatility on measured correlations. Consequently, for climate-related risks with only scarce
historic observations, measuring stressed correlations is almost impossible, which makes climate stress testing even
more challenging.

Another general limitation is the high level of uncertainty surrounding the results arising from the fact that
climate change-related risks play out over a time horizon much longer than for other, more common risks. These
stress tests usually assume a static balance sheet; thus second-round effects are ignored. Second-round effects can
amplify the stress of a climate scenario to individual banks and the banking system as a whole through, for example,
effects within the interbank credit market, spillover effects to other financial institutions (e.g., insurance companies,
see Box 2) and direct impacts on the real economy (e.g., credit supply reduction). The role of insurance companies is
crucial because increased realizations of physical risks could lead to less insurance coverage and larger insurance
protection gaps, leading to larger credit risks for banks if the collateral backing mortgages becomes uninsurable
against natural hazards (see also Box 2). Given the long time horizon of climate stress tests, it is agreed that the static
balance sheet assumption is problematic. It should arguable be relaxed, so that second-round effects can be
incorporated into the analysis. Alogoskoufis et al. (2021) also show for the European economy that second-round
effects amplify the impact of the stress, and it is crucial to analyze the effects of a climate risk scenario. The same
reasoning applies to Acharya et al. (2023) who, in addition to noting the importance of second-round effects and
feedback loops, argue that it is essential to account for “compound risk” scenarios which allows one to analyze the

The effects of climate change-related risks on banks: a literature review 27

 co-occurrence of climate risks and conventional economic stress. This criticism notwithstanding, climate stress tests
are viewed as useful risk management exercises mainly because of the potential for financial institutions, typically
banks and insurers, and financial sector supervisors, to understand more fully the threats climate change poses to
individual banks, the banking system and financial stability.

(*) This factor is developed by Litterman and the WWF and is constructed as an equity-based hedge portfolio that is long in global fossil
energy index and short in S&P 500.

Conclusion and suggestions for future work

The survey acknowledges the great number of new research papers that have very recently been made
available to understand better the various transmission channels by which climate change impacts banks.
The richness of these studies helps provide a first assessment of the distribution of risk spreads for loans,
bonds and equity, indicating that banks have started pricing these risk, while the issue remains of whether
it is adequate. Based on this material, a few provisional conclusions may be drawn, which provide directions
for future research, with a particular view to assess the robustness of these findings.
1. Apart from a few outliers, according to the overall distribution of impacts across academic studies,
the microeconomic impacts of climate change on particular portfolios are relatively small, below
50 bp on loan and bond spreads. Stock markets appear to react more significantly and appear to
have started pricing some, but maybe not all, of the risks. As a consequence, significant
uncertainty remains regarding the magnitude of the effects of climate change.
2. There are various possible explanations for why banks may be able to manage risks from climate
change at the macro level, although the situation might change over time, as climate change
accelerates. Acharya et al. (2023) argue that the pricing of climate change-related credit or market
risks only partly offsets the impacts of the realization of climate change-related shocks. Indeed,
several authors conclude that realized returns on climate change-related risks are below expected
return, providing evidence of an underestimation of risk.
3. New dimensions are uncovered, like the impact of ESG criteria as well as the reporting on
exposures, which also help to partly reduce uncertainty.
4. Liquidity issues arising from climate change-related shocks are still insufficiently researched.
5. The overall impact of climate change, which becomes multifaceted and affects various portfolios
at the same time and in a correlated fashion, may therefore be more significant. In particular, the
difficulty to model possible non-linear effects related to climate change and to capture tipping
points might lead to an underestimation of risks.
6. There are still data issues, notably in terms of granularity, as well as methodological issues, which
prevent a definite assessment of the situation, both for physical risks (lack of exact location of
the exposures in many instances) and transition risks (notably lack of evaluation for SMEs).
All in all, one may conclude that the overall balance is more in the direction of an underestimation
of the risks from climate change from the perspective of banks, rather than a situation where risks are
likely to be fully manageable by banks. The main channel is the materialization of unexpected risks
insufficiently priced in lending or bond spreads.
Note that the review did not consider the policy implications in terms of optimal prudential
regulation. Although we investigated to what extent the channels may interact with regulation, the review
did not investigate how regulation could mitigate these effects from a financial stability point of view.
Dafermos and Nikolaidi (2021) argue that capital requirements have the potential to reduce the pace of
global warming if green supporting factors and brown penalizing factors are implemented simultaneously

28 The effects of climate change-related risks on banks: a literature review

and in tandem with fiscal policies. However, alone the effect of regulation is rather small. In contrast,
Oehmke and Opp (2022) show that while banking regulation might reduce climate change-related
financial risks, they might not necessarily reduce emissions. Acharya et al. (2023) note that any increase in
capital requirements for high-emission firms to account for their more substantial transition risk exposure
might raise the cost of capital for those firms and could thus itself constitute a source of transition risk. It
is important to consider, among other things, whether green capital requirements will shift the funding of
high-emission firms from the regulated banking sector to the unregulated, or less-regulated, shadow
banking sector.
In addition, while it is not a central objective of financial regulation and maybe not an objective
at all, we did not cover an assessment of schemes with a preferential treatment for banks involved in green
lending.

The effects of climate change-related risks on banks: a literature review 29

References

Accetturo, A., G. Barboni, M. Cascarona, E. Garcia-Appendini, M. Tomasi (2022) “Credit supply and green
investments”, Available at SSRN 4093925
Acharya, V. V., Johnson, T., Sundaresan, S. and Tomunen, T. (2022). "Is physical climate risk priced? Evidence
from regional variation in exposure to heat stress". NBER Working Paper no. 30445, National Bureau of
Economic Research, September 2022.
Acharya, V. V., R Berner, R. F. Engle, H. Jung, J. Stroebel, X. Zeng, Y. Zhao (2023). "Climate stress testing".
NBER Working Paper no. 31097, National Bureau of Economic Research, April 2023.
Addoum, J. M., D. T. Ng and A. Ortiz-Bobea (2020). “Temperature shocks and establishment sales.“ The
Review of Financial Studies, Vol. 33, no. 3, pp. 1331–1366.
Addoum, J. M. and Ng, D. T. and Ortiz-Bobea, A. (2023). “Temperature Shocks and Industry Earnings News.”
Journal of Financial Economics, forthcoming.
Ahnert, T. and Co-Pierre Georg, Co-P. (2018), ”Information contagion and systemic risk”, vol. 35, issue C,
159-171.
Aldasoro, I., Delli Gatti, D. and E. Faia (2017). “Bank networks: Contagion, systemic risk and prudential
policy”, Journal of Economic Behaviour & Organization, Vol. 142, pp. 164–188.
Allen, T., Dees, S., Boissinot, J., Caicedo, C. M. Graciano, Chouard, V., Clerc, L., De Gaye, A., Devulder, A.,
Diot, S., Lisack, N., Pegoraro, F., Rabaté, M., Svartzmann R., and L. Vernet (2020). "Climate-Related Scenarios
for Financial Stability Assessment: An Application to France", Banque de France Working Paper n. 774.
Alogoskoufis, S., Dunz, N., Emambakhsh, T., Hennig, T., Kaijser, M., Kouratzoglou, C., Salleo, C. (2021). "ECB
economy-wide climate stress test: Methodology and results". ECB Occasional Paper No. 281.
Alok, S., Kumar, N. and Wermers, R. (2019) “Do Fund Managers Misestimate Climatic Disaster Risk?”.
Review of Financial Studies, Forthcoming, Indian School of Business, Available at SSRN.
Apergis, N. (2020). “Natural disasters and housing prices: Fresh evidence from a global country sample.“
International Real Estate Review, Vol. 23/2, pp. 815–836.
Aswani, J., Raghunandan, A., Rajgopal, S. (2021) « Are carbon emissions associated with stock returns?”
Review of Finance, forthcoming
Auh, J. K., J. Choi, T. Deryugina and T. Park (2022). "Natural disasters and municipal bonds". SSRN Working
Paper, July 2022, ssrn.com/abstract=3996208.
Autorité de Contrôle Prudentiel et de Résolution – ACPR (2021), "The main results of the 2020 climate pilot
exercise", Analysis and synthesis no. 122, acpr.banque-france.fr/en/analysis-and-synthesis-no-122-main-
results-2020-climate-pilot-exercise.
Baker, M., Bergstresser, D., Serafeim, G., Wurgler, J. (2018). "Financing the response to climate change: the
pricing and ownership of U.S. green bonds". NBER Working Paper no 25194, October 2018.
Bakkensen, L. A. and L. Barrage (2021). “Going underwater? Flood risk belief heterogeneity and coastal
home price dynamics.” The Review of Financial Studies, Vol. 35, issue 8, pp. 3666–3709.
Baldauf, M. L. Garlappi and C. Yannelis (2020). “Does climate change affect real estate prices? Only if you
believe in it.” The Review of Financial Studies, Vol. 33 (3), pp. 1256–1295.
Bandt (de), O., Jacolin, L., Lemaire, T. (2021). “Climate Change in Developing Countries: Global Warming
Effects, Transmission Channels and Adaptation Policies”, Banque de France Working Paper No. 822.

30 The effects of climate change-related risks on banks: a literature review

Barnett, M., Brock¸ W. and Hansen, L.P. (2020) “Pricing uncertainties related to climate change” The Review
of Financial Studies, Volume 33, Issue 3, March 2020, Pages 1024–1066
Barnett, M., Brock¸ W. and Hansen, L.P. (2022) “Climate Change Uncertainty Spillover in the
Macroeconomy”, NBER Macroeconomics Annual, volume 36, 2022.
Barrot, J.-N. and J. Sauvagnat (2016). “Input specificity and the propagation of idiosyncratic shocks in
production networks”, The Quarterly Journal of Economics vol 131, no 3, pp. 1543–1592.
Bartram, S. M., Hou, K. and Kim, S. (2022). “Real effects of climate policy: Financial constraints and
spillovers.” Journal of Financial Economics, Vol. 143(2), pp. 668–696.
Battiston, S., Mandel, A., Monasterolo, I., Schütze, F. and Visentin, G. (2017). “A climate stress-test of the
financial system”. Nature Climate Change, Vol. 7(4), pp. 283–288.
Baudino, Patrizia and Jean-Philippe Svoronos (2021). “Stress-testing Banks for Climate Change – a
Comparison of Practices”, FSI Insights on Policy Implementation No 34.
BCBS (2021a). “Climate-related risk drivers and their transmission channels”, BIS, April.
BCBS (2021b). “Climate-related financial risks – measurement methodologies”, BIS, April.
Bell, J., G. Battisti and B. Guin (2023). "The greening of lending: mortgage pricing of energy transition risk".
Staff working paper (No. 1016), Bank of England.
Belloni, M., F. Kuik and L. Mingarelli (2022). "Euro area bank’s sensitivity to changes in carbon prices". (No.
2654) European Central Bank Working Paper Series, March 2022.
Beltrán, A. and Maddison, D. and Elliott, R. J. R. (2018). “Is flood risk capitalised into property values?”
Ecological Economics, Vol. 146, pp. 668–685.
Benetton, M., S. Emiliozzi, E. Guglielminetti, M. Loberto and A. Mistretta (2022): "Do house prices 31eflect
climate change adaption? Evidence from the city on the water". Banca d’Italia Occasional Papers no. 735,
November 2022.
Benincasa, E., Kabas, G. and Ongena, S. R. G., "There is No Planet B", But for Banks There are "Countries B
to Z": Domestic Climate Policy and Cross-Border Bank Lending (October 1, 2021). CEPR Discussion Paper
No. DP16665, Available at SSRN: https://ssrn.com/abstract=3960269
Bernstein, A., M. T. Gustafson and R. Lewis (2019). “Disaster on the horizon: the price effect of sea level
rise.” Journal of Financial Economics, Vol. 134 (2), pp. 253–272.
Beyene, W., K. De Greiff, M. D. Delis, and S. Ongena (2021). "Too-big-to-strand? Bond versus bank financing
in the transition to a low-carbon economy". (No. 16692) CEPR Discussion Paper.
Beyene, W., Falagiarda, M., Ongena, S. R. G. and Scopelliti, A. (2022). "Do Lenders Price the Brown Factor in
Car Loans? Evidence from Diesel Cars". Swiss Finance Institute Research Paper No. 22-76.
Billio, M., Getmansky, M., Lo, A. W., and L. Pelizzon (2012). “Econometric measures of connectedness and
systemic risk in the finance and insurance sectors.” Journal of financial economics, Vol. 104(3), pp. 535–559.
Billio, M., Costola, M., Hristova, I., Latino, C. and Pelizzon, L. (2022). "Sustainable finance: A journey toward
ESG and climate risk". SSRN Working Paper, April 2022, papers.ssrn.com/sol3/
papers.cfm?abstract_id=4093838.
Beirne, J., Renzhi, N., and Volz, N. (2021). “Feeling the heat: Climate risks and the cost of sovereign
borrowing”, International Review of Economics & Finance, Vol. 76(C), pp. 920–936.
Bin, O., T. W. Crawford, J. B. Kruse, and C. E. Landry (2008a). “Viewscapes and flood hazard: Coastal housing
market response to amenities and risk,” Land Economics, Vol. 84, pp. 434–448.

The effects of climate change-related risks on banks: a literature review 31

Birindelli, G., Bonanno, G., Dell'Atti, S. and Iannuzzi, A. P. (2022). “Climate change commitment, credit risk
and the country's environmental performance: Empirical evidence from a sample of international banks.”
Business Strategy and the Environment, Vol. 31(4), pp. 1641–1655.
Blickle, K. S., S. N. Hamerling and D. P. Morgan (2022). "How bad are weather disasters for banks?". (No.
990). Federal Reserve Bank of New York Staff reports, January 2022, www.newyorkfed.org/medialibrary/
media/research/staff_reports/sr990.pdf.
Bolton, P., Despres, M., Pereira Da Silva, L.A., Samama, F., Svartzman, R. (2020). "The green swan − central
banking and financial stability in the age of climate change". Banque de France and Bank for International
settlements. Technical report.
Bolton, P., M. Kacperczyk., (2021a). “Do Investors Care about Carbon Risk?” Journal of Financial Economics,
Vol. 142, Issue 2, November 2021, pp. 517–549.
Bolton, P., M. Kacperczyk., (2021b). “Global pricing of carbon risk”, NBER Working paper, National Bureau
for Economic Research, no. 28510, February.
Bolton, P., M. Kacperczyk., (2021c). “Carbon Disclosure and the Cost of Capital”. SSRN Working Paper,
papers.ssrn.com/sol3/papers.cfm?abstract_id=3755613.
Bolton, P., M. Kacperczyk., (2022) “The Financial cost of Carbon”. Journal of Applied Corporate Finance, Vol.
34 (2), Spring 2022, pp. 17–19.
Botzen, W J W and C J Van Den Bergh (2008): "Insurance against climate change and flooding in the
Netherlands". Present, future, and comparison with other countries, Risk Analysis, Vol. 28, issue 2, pp. 413–
426.
Bowman, L., D. Hu, M. Hu, A. Madaan and A. B. da Silva (2022). "Assessing Climate Change Impact on
Sovereign Bonds". The Journal of Portfolio Management, Vol. 48(10), pp 98–118.
Brar, J., Kornprobst, A., Braun, W. J., Davison, M. and Hare, W. (2021). "A Case Study of the Impact of Climate
Change on Agricultural Loan Credit Risk.” Mathematics, Vol. 9(23), 3058.
Brei, M., Mohan, P. and Strobl, E. (2019). "The impact of natural disasters on the banking sector: Evidence
from hurricane strikes in the Caribbean.” The Quarterly Review of Economics and Finance, Vol. 72, pp. 232–
239.
Brownlees, Christian T. and Robert F. Engle (2017). “SRISK: A Conditional Capital Shortfall Index for
Systemic Risk Measurement,” Review of Financial Studies, Vol. 30, issue1, pp. 48–79.
Bua, G., Kappa, D., Ramella, F., Rognone, L. (2022). "Transition Versus Physical Climate Risk Pricing in
European Financial Markets: A Text-Based Approach". ECB Working Paper.
Caloia, F. and D.J. Jansen (2021). "Flood risk and financial stability: Evidence from a stress test for the
Netherlands". (No. 730m) Working Paper DNB, November 2021.
Capasso, G., Gianfrate, G. and Spinelli, M. (2020). “Climate change and credit risk.” Journal of Cleaner
Production, Vol. 266, 121634.
Carbone, S., Giuzio, M., Kapadia, S., Krämer, J. S., Nyholm, K. and Vozian, K. (2022). "The low-carbon
transition, climate commitments and firm credit risk". SUERF Policy Brief 309.
Carrizosa, R. and Ghosh, A. A. (2022). "Sustainability-linked loan contracting". Available at SSRN 4103883.
Cevik, S. and Jalles, J.T. (2020). "This Changes Everything: Climate Shocks and Sovereign Bonds". (No. 20/79)
IMF Working Papers.
Charpentier, A. (2007). "Insurability of climate risks". The Geneva Papers on Risk and Insurance – Issues and
Practices, Vol. 33, pp. 91–109.

32 The effects of climate change-related risks on banks: a literature review

Charpentier, A, L Barry and M James (2021): "Insurance against natural catastrophes: balancing actuarial
fairness and social solidarity". Geneva Papers on Risk and Insurance – Issues and Practices, Vol. 47(2).
Chava, S. (2014). “Environmental Externalities and Cost of Capital”, Management Science, Vol. 60, Issue 9,
pp. 2223–2247.
Chavaz, M. (2016). "Dis-integrating credit markets: diversification, securitization, and lending in a recovery".
(No. 617) Bank of England Staff Working Paper.
Chen, Y., Goulder, L. H., Hafstead, M. A. C. (2018) “The sensitivity of CO2 emission under a carbone tax to
alternative baseline forecasts” Climate Change Economics, Vol. 09, No. 01.
Chen, I. J., Hasan, I., Lin, C. Y. and Nguyen, T. N. V. (2021). "Do banks value borrowers' environmental
record? Evidence from financial contracts". Journal of Business Ethics, 174, pp. 687–713.
Choi, D., Gao, Z. and Jiang, W. (2020). “Attention to Global Warming.” Review of Financial Studies, Vol. 33
(3), pp 1112–1145.
Citino, L., Palma, A. and Paradisi, M. (2021). "Dance for the rain or pay for insurance? An empirical analysis
of the Italian crop insurance market", mimeo, December 2021, luca-citino.github.io/docs/
CPP_dance_for_the_rain.pdf.
Clayton, J., Devaney, S., Sayce, S. and van de Wetering, J. (2021). "Climate Risk & Commercial Property
Values: A review and analysis of the literature". UNEP FI Working Paper.
Cleary P., W. Harding, J. McDaniels, J.-P. Svoronos and J. Yong (2019): "Turning up the heat – climate risk
assessment in the insurance sector", FSI Insights on policy implementation No 20.
Cohen, L., Gurun, U. G. and Nguyen, Q. H. (2020). "The ESG-innovation disconnect: Evidence from green
patenting". NBER working paper, no. 27990, National Bureau of Economic Research.
Correa, R., A. He, C. Herpfer and U. Lel (2023). "The rising tide lifts some interest rates: Climate change,
natural disaters and loan pricing". (No. 889/2023) ECGI Working Papers in Finance, March 2023.
Cortés, K. R. and Strahan, P. E. (2017). "Tracing out capital flows: How financially integrated banks respond
to natural disasters". Journal of Financial Economics, Vol. 125(1), pp. 182–199.
Covas, Francisco (2020): “Challenges in Stress Testing and Climate Change”, Bank Policy Institute Research
Paper, 9 October.
Dafermos, Y. and M. Nikolaidi (2021). “How can green differentiated capital requirements affect climate
risks? A dynamic macrofinancial analysis.” Journal of Financial stability, Vol. 54, issue C.
Dai, W. (2020) “Greenhouse Gas Emissions and Expected Returns ” Available at
SSRN: http://dx.doi.org/10.2139/ssrn.3714874
Danielsson, M. (2020). "Rising sea levels due to global warming will entail increased risks to housing".
Economic commentaries, Sveriges Riksbank.
Degryse, H., Goncharenko, R., Theunisz, C. and Vadasz, T. (2023). "When green meets green". Journal of
Corporate Finance, Volume 78, February 2023,
Dessaint, O. and A. Matray (2017). "Do managers overreact to salient risks? Evidence from hurricane
strikes". Journal of Financial Economics, Vol. 126 (1), pp. 97–121.
De Guindos, L. (2021). "Shining a light on climate risks: the ECB’s economy-wide climate stress test". The ECB
Blog, 18.
Delis, M., De Greiff, K., Iosifidi, M. S. Ongena, (2021). "Being Stranded with Fossil Fuel Re-serves. Climate
policy risk and the pricing of bank loans". (No. 18-10) Swiss Finance Institute Research Paper Series.

The effects of climate change-related risks on banks: a literature review 33

Dessaint, O. and A. Matray (2017). “Do managers overreact to salient risks? Evidence from hurricane
strikes”, Journal of Financial Economics, Vol. 126, no 1, pp. 97–121.
Do, V., Nguyen, T. H., Truong, C. and Vu, T. (2021). “Is drought risk priced in private debt contracts?”
International Review of Finance, Vol. 21(2), pp. 724–737.
Ehlers, T., Packer, F. and de Greiff, K. (2022). “The pricing of carbon risk in syndicated loans: Which risks are
priced and why?” Journal of Banking & Finance, Vol. 136, 106180.
Emambakhsh, T., Fuchs, M., Kördel, S., Kouratzoglou, C., Lelli, C., Pizzeghello, R., Salleo, C. and Spaggiari,
M. (2023). “The Road to Paris: stress testing the transition towards a net-zero economy”, ECB Occasional
Paper Series No. 328.
Eren, E, F Merten and N Verhoeven (2022). "Pricing of climate risks in financial markets: a summary of the
literature". BIS Papers No 130.
European Central Bank (2022): "2022 climate risk stress test". July 2022,
European Central Bank (2023): "Policy options to reduce the climate insurance protection gap", Discussion
Paper, April 2023.
European Systemic Risk Board (2021): “Climate-related risk and financial stability”, July 2021.
European Systemic Risk Board (2022): “The macroprudential challenge of climate change”, July 2022.
Ferentinos, K., A. Gibberd and B. Guin (2023). "Stranded houses? The price effect of a minimum energy
efficiency standard". Energy Economics, Volume 120.
Forbes, K. and R. Rigobon (1999): “No Contagion, Only Interdependence: Measuring stock market co-
movements”, NBER Working Paper No. 7267, July. Published in Journal of Finance, Volume 57, Issue 5,
October 2002, pp. 2223–2261.
Friede, G., Busch, T. and Bassen, A. (2015). "ESG and financial performance: aggregated evidence from
more than 2000 empirical studies". Journal of Sustainable Finance & Investment, 5(4), pp. 210–233.
Fuerst, F. and G. Warren-Myers (2021). “Pricing climate risk: Are flooding and sea level rise risk capitalised
in Australian residential property?”. Climate Risk Management.
Furukawa. K., H. Ichiue, N. Shiraki (2020). "How Does Climate Change Interact with the Financial System? A
Survey". Bank of Japan staff working paper.
Gallagher, J. and D. Hartley (2017). “Household finance after a natural disaster: The case of Hurricane
Katrina.” American Economic Journal: Economic Policy, Vol. 9, pp. 199–228.
Garbarino, N. and B. Guin (2021). “High water, no marks? Biased lending after extreme weather.” Journal
of Financial Stability, Vol. 54.
Giannetti, M., M. Jasova, M. Loumioti, C. Mendicino (2023) “Glossy banks”. SSRN
Giglio, S., Kelly, B., Stroebel, J. (2021a) "Climate Finance", Annual Review of Financial Economics, 13, pp. 15–
36.
Giglio, S., M. Maggiori, K. Rao, J. Stroebel and A. Weber (2021b). “Climate change and long-run discount
rates: Evidence from real estate.” The Review of Financial Studies, Vol. 34, pp. 3527–3571.
Giglio, S., Maggiori, M., Stroebel, J., Tan, Z, Utkus, S. and Xu, X. (2023). "Four Facts About ESG Beliefs and
Investor Portfolios". NBER Working Paper no. 31114, National Bureau of Economic Research, April 2023.
Ginglinger, E. and Moreau, Q. (2019). "Climate risk and capital structure". (No. 327185) Université Paris-
Dauphine Research Paper.

34 The effects of climate change-related risks on banks: a literature review

Goldsmith-Pinkham, P. S., Gustafson, M. Lewis, R. and Schwert, M. (2021). "Sea Level Rise Exposure and
Municipal Bond Yields". Jacobs Levy Equity Management Center for Quantitative Financial Research Paper,
October 2021
Gourevitch, J. D., C. Kousky, Y. Kiao, C. Nolte, A. B. Pollack, J. R. Porter and. J. A. Weill (2023). "Unpriced
climate risk and the potential consequences of overvaluation in US housing markets", Nature Climate
Change, no. 13, pp. 250–257
Gray, I. (2021). “Hazardous simulations: Pricing climate risk in U.S. coastal insurance markets.” Economy
and Society, Vol. 50, issue 2.
Griffiths, R., I. Hamilton and G. Huebner (2015). "The role of energy bill modelling in mortgage affordability
calculations". UK Green Building Council, August 2015, ukgbc.s3.eu-west-2.amazonaws.com/wp-
content/uploads/2017/09/05152811/The-role-of-energy-bill-modelling-in-mortgage-affordability-
calculations.pdf.
Guin, B., P. Korhonen and S. Moktan (2022). "Risk differentials between green and brown assets?”, Economic
Letters Vol. 213(6).
Hadzilacos, G., R. Li, P. Harrington, S. Latchman, J. Hillier, R. Dixon, C. New, A. Alabaster and T. Tsapko
(2021). "It’s windy when it’s wet: why UK insurers may need to reassess their modelling assumptions". Bank
Undergound, April 2021.
Hauptmann, C. (2017). "Corporate sustainability performance and bank loan pricing: It pays to be good, but
only when banks are too". Saïd Business School WP, 20.
Hino, M. and M. Burke (2020). "Does information about climate risk affect property values?" (No. 26807)
NBER Working Paper.
Höck, A., Klein, C., Landau, A. and Zwergel, B. (2020). "The effect of environmental sustainability on credit
risk.” Journal of Asset Management, Vol. 21(2), pp. 85–93.
Hong, H., F. W. Li and J. Xu (2019). “Climate risks and market efficiency.” Journal of Econometrics, Vol 208,
no 1, pp. 265–281.
Hovekamp, W. P., K. R. H. Wagner (2023). "Efficient adaption to flood risk" (No. 10243) CESifo Working
Paper.
Hsu, P.-H., Li, K. and Tsou, C.-Y. (2023). "The Pollution Premium", SSRN Working Paper.
Huang, B., Punzi, M. T. and Wu, Y. (2019). "Do Banks price environmental risk? Evidence from a quasi natural
experiment in the people’s republic of China". (No. 974) Asian Development Bank Institute, Working Paper
Series, July 2019.
Huynh, T. D., Nguyen, T. H. and C. Truong (2020) “Climate risk: the price of drought”. Journal of Corporate
Finance, Vol. 65.

Ilhan, E., Krueger, P., Sautner, Z. and Starks, L. T. (2023). "Climate risk disclosure and institutional investors".
The Review of Financial Studies, 36(7), pp. 2617–2650.
Ilhan, E., Sautner, Z. and Vilkov, G. (2021). "Carbon tail risk.” The Review of Financial Studies, Vol. 34(3),
1540-1571.
IPCC (2023): "Summary for Policymakers". Climate Change 2023: Synthesis Report. Contribution of Working
Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Core
Writing Team, H. Lee and J. Romero (eds.)]. IPCC, Geneva, Switzerland, pp. 1-34, doi: 10.59327/IPCC/AR6-
9789291691647.001
Javadi, S., Masum, A.-A. (2021) "The impact of climate change on the cost of bank loans", Journal of
Corporate Finance, Volume 69, August 2021, 102019.

The effects of climate change-related risks on banks: a literature review 35

Jorgenson, D. W. (2018) « Econometric general equilibrium modelling” Journal of Policy Modeling Volume
38, Issue 3, May–June 2016, Pages 436-447
Jourde, T., and Q. Moreau (2023). “Systemic Climate Risk”, SSRN working paper available at
SSRN: ssrn.com/abstract=4300469.
Jung, H, R Engle and R Berner (2022): “Climate stress testing”, Federal Reserve Bank of New York Staff
Reports, no 977, June
Jung, H., Santos, J. A. and Seltzer, L. (2023). "U.S. Banks’ Exposures to Climate Transition Risks". FRB of New
York Staff Report, (1058).
Kacperczyk, M. and Peydro, J.-L. (2022), “Carbon Emissions and the Bank-Lending Channel”, Available at
SSRN: http://dx.doi.org/10.2139/ssrn.3915486
Kaza, N., R. G. Quercia and C. Y. Tian (2014). “Home energy efficiency and mortgage”, Community
Development Innovation Review, issue 01, pp. 63–69.
Keys, B. (2023). “Your homeowners’ insurance bill is the canary in the coal mine”, New York Times, Guest
Essay, May 7, 2023.
Keys, B. J. and P. Mulder (2020). “Neglected no more: housing markets, mortgage lending, and sea level rise”.
NBER Working Paper no. 27930, National Bureau of Economic Research.
Kim, S., Kumar, N., Lee, J. and Oh, J. (2022). “'ESG' lending". In Proceedings of Paris December 2021 Finance
Meeting EUROFIDAI-ESSEC, European Corporate Governance Institute–Finance Working Paper (No. 817)
Kim, D. and Pouget, S. (2023). “Who benefits from the bond greenium?”. Available at SSRN.
Kim, M., Surroca, J. and Tribó, J. A. (2014). “Impact of ethical behavior on syndicated loan rates”. Journal of
Banking & Finance, Vol. 38, pp. 122–144.
Kivedal, B. K. (2023). "Natural disasters, insurance claims and regional housing markets". (No. 2023/1)
Housing Lab Working Paper Series.
Kleimeier, S. and Viehs, M. (2018) “Carbon Disclosure, Emission Levels, and the Cost of Debt”, Available
at SSRN: http://dx.doi.org/10.2139/ssrn.2719665
Kousky, C., H. Kunreuther and M. LaCour-Little and S. Wachter (2020a). “Flood risk and the U.S. housing
market.” Journal of Housing Research, Vol. 29, issue sup. 1.
Kousky, C., M. Palim and Y. Pan (2020b). “Flood damage and mortgage credit risk: a case study of hurricane
Harvey.” Journal of Housing Research, Vol. 29, sup1.
Kraehnert, K., D Osberghaus, C. Holt, L. T. Habtemariam, F. Wätzold, L. P. Hecker and S. Fluhrer (2021):
"Insurance against extreme weather events: An overview". Review of Economics, Vol. 72/2.
Kraemer and Negrilla (2014). "Climate Change Is A Global Mega-Trend For Sovereign Risk". S&P Ratings
Services.
Kruttli, M. S., B. Roth Tran and S. W. Watugala (2021). "Pricing Poseidon: Extreme weather uncertainty and
firm return dynamics". Working Paper, Board of Governors of the Federal Reserve System.
Krueger, P. (2015). "Climate Change and Firm Valuation: Evidence from a Quasi-Natural Experiment". Swiss
Finance Institute Research Paper no. 15-40.
Krueger, P., Z. Sautner, L. T. Starks (2020). “The Importance of Climate Risks for Institutional Investors” The
Review of Financial Studies, Vol. 33, Issue 3, pp. 1067–1111.
Krueger, P., Sautner, Z., Tang, D. Y. and Zhong, R. (2023). "The effects of mandatory ESG disclosure around
the world". European Corporate Governance Institute–Finance Working Paper, (754), pp. 21–44.

36 The effects of climate change-related risks on banks: a literature review

Laeven, L., Popov, A. (2023) Carbon taxes and the geography of fossil lending, Journal of International
Economics, Volume 144, September 2023,
Lenton, T. M., Rockström, J., Gaffney, O., Rahmstorf, S., Richardson, K., Steffen, W., and Schellnhuber, H. J.
(2019). “Climate tipping points—too risky to bet against.” Nature, Vol. 575(7784), pp. 592–595.
Li, C., J. Cong, H. Gu and X. Xiang (2016). "Extreme heat and exports: Evidence from Chinese exporters".
Working Paper, Jinan University.
Li, Q., H. Shan, Y. Tang, and V. Yao (2020). "Corporate climate risk: Measurements and responses". (No.
3508497) SSRN Working Paper.
Loretan, Mico and William B English (2000): “Evaluating Changes in Correlations during Periods of High
Market Volatility”, BIS Quarterly Review, June.
Mallucci, E.(2020). "Natural Disasters, Climate Change, and Sovereign Risk". (No.1291) International Finance
Discussion Papers, Board of Governors of the Federal Reserve System.
Meisenzahl, R. (2023). "How Climate Change Shapes Bank Lending: Evidence from Portfolio Reallocation".
Working Paper Series WP 2023-12, Federal Reserve Bank of Chicago.
Meng, K. C. (2017). "Using a free permit rule to forecast the marginal abatement cost of proposed climate
policy." American Economic Review, Vol. 107, no. 3, pp. 748–784.
Mésonnier, J.-S. (2021). “Banks’ climate commitments and credit to carbon-intensive industries: new
evidence for France.” Climate Policy, forthcoming.
Mirone, G. and J. Poeschl (2021). "Flood risk discounts in the Danish housing market". (No. 7/2021) Economic
memo, Danmarks Nationalbank.
Monasterolo, I. de Angelis, L. (2020) “Blind to carbon risk? An analysis of stock market reaction to the Paris
Agreement, Ecological Economics, Volume 170, April 2020,
Mueller, I. and Sfrappini, E. (2022). “Climate change-related regulatory risks and bank lending.”, Economic
Letters, Vol. 220, November 2022.
Murfin, J. and M. Spiegel (2020). "Is the risk of sea level rise capitalized in residential real estate?". Review
of Financial Studies, Vol. 33, no 3.
NGFS (2022). “Network Greening the Financial Sytsem: Running the NGFS scenarios in G-cubed: A tale of
two modelling frameworks.” NGFS Occasional Papers. Running the NGFS Scenarios in G-Cubed: A Tale of
Two Modelling Frameworks | Banque de France
NGFS (2023), “NGFS Survey on Climate Scenarios: Key findings”, June 2023, Network Greening the Financial
System, June 2023.
Nguyen, D. D., Ongena, S., Qi, S. and Sila, V. (2022). “Climate change risk and the cost of mortgage credit.”
Review of Finance, Vol. 26(6), pp. 1509–1549.
Ntelekos, A., D. Papachristou and J. Duan (2018). "U.S. Hurricane Clustering: A New Reality?". Bank
Undergound May 2018.
Ochoa, M., Paustian, M. O. and Wilcox, L. (2022). "Do Sustainable Investment Strategies Hedge Climate
Change Risks? Evidence from Germany's Carbon Tax". SSRN Working Paper.
Oehmke, M. and M. M. Opp (2022). "Green capital requirements". (No. 22-16) Swedish House of Finance
Research Papers, February 2022.
Oh, S. S., I. Sen, and A.-M. Tenekedjieva (2022). "Pricing of Climate Risk Insurance: Regulation and Cross-
Subsidies", FED Working Paper, November 2022.

The effects of climate change-related risks on banks: a literature review 37

Owen, S. and I. Noy (2019): "Regressivity in Public Natural Hazards Insurance: a quantitative analysis of the
New Zealand case". Economics of Disasters and Climate Change, volume 3, pp. 235–255.
Pagliari, M. S. (2023). “LSIs’ exposures to climate change related risks: an approach to assess physical risks.”
International Journal of Central Banking, March 2023.
Painter (2020) An inconvenient cost: The effects of climate change on municipal bonds, Journal of Financial
Economics, Volume 135, Issue 2, February 2020, Pages 468-482
Panjwani, A., Melin, L., Mercereau, B. (2023). "Do Scope 3 Carbon Emissions Impact Firms’ Cost of Debt?".
SSRN Working Paper.
Pankratz, N., R. Bauer and J. Derwall (2019). "Climate change, firm performance, and investor surprises.”
Management Science (2023).
Pankratz, N. M. and C. M. Schiller (2019). "Climate change and adaptation in global supply-chain networks",
Working Paper, Board of Governors of the Federal Reserve System.
Pastor, L., Stambaugh, R., Taylor, L. A. (2022). "Dissecting Green Returns", SSRN Working Paper.
Pindyck, R. S. (2020). "What we know and don’t know about climate change, and implications for policy".
NBER Working Paper no. 27304, National Bureau of Economic Research.
Polacek, A (2018): "Catastrophe bonds: A primer and retrospective", Chicago Fed Letter, No. 405, Federal
Reserve Board of Chicago.
Ramelli, S., E. Ossola, and M. Rancan (2021). "Stock price effects of climate activism: Evidence from the first
Global Climate Strike." Journal of Corporate Finance, Vol. 69.
Ramelli, S., A. F. Wagner, R. J. Zeckhauser, and A. Ziegler (2021). "Investor rewards to climate responsibility:
Stock-price responses to the opposite shocks of the 2016 and 2020 U.S. elections." The Review of Corporate
Finance Studies, Vol. 10, no. 4, pp. 748–787.
Reeken, J. van, S. Phlippen (2022). "Is flood risk already affecting house prices?". ABN-AMBO memo
Reghezza, A., Altunbas, Y., Marques-Ibanez, D., Rodriguez d’Acri, C., Spaggiari, M. (2022). "Do banks fuel
climate change?" Journal of Financial Stability, Volume 62, October 2022.
Rodríguez, M. L., M. L. Garcia Lorenzo, M. Medina Magro and G. Perez Quiros (2023). "Impact of climate
risk materialization and ecological deterioration on house prices in Mar Menon, Spain". Scientific Reports,
no. 13, article no. 11772.
Roncoroni, A., Battiston, S., D’Errico, M., Hałaj, G., and C. Kok (2021a). “Interconnected banks and
systemically important exposures.” Journal of Economic Dynamics and Control, Vol. 133, 104266.
Roncoroni, A., Battiston, S., Escobar-Farfán, L. O., and S. Martinez-Jaramillo (2021b). “Climate risk and
financial stability in the network of banks and investment funds.” Journal of Financial Stability, Vol. 54,
100870.
Rousova, L. F., Giuzio, L. M., Kapadia, S., Kumar, H., Mazzotta, L., Parker, M., Zafeiris, D. (2023): "The
macroeconomic effects of the insurance climate protection gap", mimeo, ECB/EIOPA.
www.suomenpankki.fi/globalassets/en/financial-stability/events/sra-2023/papers/margherita-giuzio---
the-macroeconomic-effects-of-the-climate-insurance-protection-gap.pdf

Schubert, V. (2022). "Is flood risk priced in bank returns?". mimeo, Stockholm School of Economics.
Seltzer, L. H., Starks, L. and Zhu, Q. (2022). "Climate regulatory risk and corporate bonds". NBER working
paper no. 29994, National Bureau of Economic Research.

38 The effects of climate change-related risks on banks: a literature review

Somanathan, E., R. Somanathan, A. Sudarshan and M. Tewari (2021). “The impact of temperature on
productivity and labor supply: Evidence from Indian manufacturing.” Journal of Political Economy, Vol. 129,
no. 6.
Stern, N. and Stern, N. H. (2007). "The economics of climate change: the Stern review". Cambridge University
press.
Stern, N. (2013). “The structure of economic modelling of the potential impacts of climate change: grafting
gross underestimation of risk onto already narrow science models”. Journal of Economic Literature, Vol.
51(3), pp. 838–859.
Takahashi, K. and Shino, J. (2023). "Greenhouse gas emissions and bank lending". (No. 1078) BIS Working
Papers, March 2023.
Traore, N. and J. Foltz (2017). "Temperatures, productivity, and firm competitiveness in developing countries:
Evidence from Africa". Working Paper, University of Wisconsin-Madison.
Vermeulen, R., Schets, E., Lohuis, M., Kölbl, B., Jansen, D. J. and Heeringa, W. (2021). "The heat is on: A
framework for measuring financial stress under disruptive energy transition scenarios.” Ecological
Economics, Vol. 190.
Volz, U., Beirne, J., Preudhomme, N. A., Fenton, A., Mazzacurati, E., Renzhi, N. and Stampe, J. (2020).
"Climate Change and Sovereign Risk". (No. 3) FSA Occasional Paper.
Wu, Z., Y.-C. Shih, Y. Wang, and R. Zhong (2023). "Carbon Risk and Corporate Cash Holdings". (No. 4316705)
SSRN Working Paper.
Xia, D and O Zulaica (2022). “The term structure of carbon premia". BIS Working Papers No 1045.
Xie, V. (2017). "Heterogeneous firms under regional temperature shocks: exit and reallocation, with evidence
from Indonesia". Working Paper, University of California San Diego.
Yuan, N., and Y. Gao(2022). "Does green credit policy impact corporate cash holdings?". Pacific-Basin
Finance Journal, Vol. 75.
Zancanella, P., P. Bertoldi and B. Boza-Kiss (2018). "Energy efficiency, the value of buildings and the payment
default risk", JRC Science for Policy Report, European Commission.
Zenios, S. A. (2021). "The risks from climate change to sovereign debt in Europe". Policy Contribution Issue,
no 16/21, July 2021
Zerbib, O. D. (2019). “The Effect of Pro-Environmental Preferences on Bond Prices: Evidence from Green
Bonds.” Journal of Banking & Finance, Vol. 98, pp. 39–60.
Zhang, P., O. Deschenes, K. Meng and J. Zhang (2018). “Temperature effects on productivity and factor
reallocation: Evidence from a half million Chinese manufacturing plants”, Journal of Environmental
Economics and Management, vol. 88, pp. 1–17.
Zivin, J. S. G., Y. Liao and Y. Panassie (2020). "How hurricanes sweep up housing markets: Evidence from
Florida". NBER Working Paper no. 27542, National Bureau of Economic Research.

The effects of climate change-related risks on banks: a literature review 39