An Analysis of Physical Climate Change Events on Commercial Bank Stock Prices

Abstract

Events resulting from climate change can cause a wide range of serious implications for investors and insurance companies. However, there is currently a lack of understanding of how banks can be affected. Exploring a range of disaster experiences is essential to build a systematic understanding of the effects of the physical impacts of climate change on banking. Climate related effects can potentially increase the risk exposure of banks both directly and indirectly, through production interruptions, destroyed collateral and affected loans. This increased risk exposure is often reflected through declines in share prices for the banks at risk. This research aims to explore physical risks in the context of commercial banking by using event study tools to analyze changes in returns after a physical event period in both North America and the Caribbean, comparing the effects of physical climate change in each region, in order to gain an understanding of how physical risks are perceived by banks. This highlights how physical climate change may affect their business, as well as any differences in the effects of physical risks in developed versus developing countries. The results indicate a need for promoting appropriate risk responses in both developed and especially developing countries for climate-related physical risks. It also highlights the importance of climate-related financial disclosures. The results from this research can be used in the development of climate risk matrices and are especially relevant to banks conducting business in developing countries.