Mannheim Research Featured on Knowledge@Wharton: How Banks Can Be Drivers of Climate Action

Research on Climate Consciousness in the Banking Sector

The research, entitled “Transparency and Real Effects of Climate Stress Tests for Banks”, was conducted by Wharton professor Luzi Hail, in collaboration with Prof. Dr. Jannis Bischof, Chair of Business Administration and Accounting, and doctoral students Vincent Giese and Gerrit von Zedlitz of Mannheim Business School. In the study, the researchers analyze how climate stress tests imposed by regulators influence European banks in their reporting, risk management, and lending.

Using data from 230 major European banks from 2017 to 2022, the authors examine whether the systematic measurement and reporting of climate risks actually leads to changes in bank behavior and whether these changes also affect companies that depend on bank financing.

Three Key Takeaways From the Study

The Knowledge@Wharton article highlights three key insights from the study. First, the results demonstrate that climate stress tests improve transparency, but not equally across all banks. Banks that have long been engaged with climate issues seem to use these stress tests to enhance their reporting on climate risks.

Second, it appears that these so-called committed banks are the ones adjusting their credit and investment policies. When borrowers face higher transition risks, these banks implement stricter financing conditions and restrict investments in activities that threaten the transition to a low-carbon economy.

Thirdly, the research indicates that these decisions genuinely impact companies. Firms facing high climate-related risks tend to decrease their total and long-term borrowing and experience slower growth in fixed assets and sales. This underscores how financial regulation can indirectly shape investment choices within the economy.

Banks as Change Agents in the Climate Transition

The attention from Knowledge@Wharton highlights the wider importance of the research. The findings demonstrate that climate stress tests are not merely an administrative tool but can actually motivate banks to incorporate climate risks into their main operations. At the same time, the research clearly shows that the effectiveness of these measures depends largely on the incentives and existing commitment of the banks themselves.

Further Readings:

• Read the full background article on Wharton@Knowledge.
• The full research paper can be read here.