Disclosing the Climate Within: How Risk Transparency Shapes Financial Stability in Banks

Abstract

The risks that come with the changes in climate now create big threats to the financial system in the world, especially the banking sector, as things are getting worse due to the change in climate. This paper will address commitment to disclosure of climate risk and its potential to improve financial stability at bank level in addition to how open reporting in terms of climate risk affects compliance with regulations, effects of risk mitigation practices and investor confidence. This study evaluates the disclosure of climate risks in the light of international guidelines through an analysis of data provided by major financial institutions and central banks. Using a mixed methodology that integrates results of content analysis of annual and sustainability reports with quantitative variables measuring economic stability in the banking sector, the research finds a positive correlation between full climate risk disclosure and resilience in the banking sector. It also determines regional differences in the disclosure practices and the mentioned statement proves the necessity of uniform standards of reporting which could be enforced. This conclusion implies that climate risk disclosure can be deemed as not only ethically and regulatory matters but effective strategic measures of long-term financial sustainability. The study fills a gap in the emerging literature on sustainable finance and generates recommendations about policy integration of climate risk into prudential regulation. The research is quite informative to policymakers, bank managers and stakeholders who want to align the practices in the financial sector with the Sustainable Development Goals (SDGs), particularly SDG 13 (Climate Action), and SDG 16 (Peace, Justice and Strong Institutions).