Work

Bank Responses to Physical and Transition Risks in Lending: A Diagnostic Framework From a Systematic Literature Review

Year: 2025

Type: review

Abstract: ABSTRACT Banks face mounting pressure to integrate climate risks into lending, yet responses remain incoherent. This systematic literature review of 9034 studies synthesizes 68 peer‐reviewed articles and develops a behavioral typology of five bank responses: recovery, containment, repricing, reallocation, and relational transformation. Responses vary by risk type, visibility, and salience. Acute, unexpected physical risks (nine studies) trigger recovery lending, while expected (five) or chronic risks (12) lead to containment or repricing. Transition risks (42) are more consistently priced when indicators are quantifiable and policy‐aligned; softer ESG signals elicit conditional responses. Asymmetries arise: recovery and containment occur only for physical risks, while strategic reallocation remains rare. Carbon‐intensive firms are penalized, while green firms benefit only when performance is credible and verifiable. We propose a diagnostic framework to evaluate climate risk management in lending, providing a novel tool to assess climate risk integration in bank lending and inform regulatory design and sustainability‐oriented strategy.

Source: Business Strategy and the Environment

DOI: 10.1002/bse.70176

Authors: Tabea Brüggemann, Rainer Lueg

Institutions: Leuphana University of Lüneburg, University of Southern Denmark, Europa-Universität Flensburg

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: hybrid

Estimated APC paid: $4,480