From stability to sustainability: how bank risks and climate exposures influence ESG

The purpose of this study is to investigate the connection between the bank risks and climate risks with environmental, social, and governance (ESG) performance of the banking institutions in Asia Pacific countries. In this study, bank risk is represented by three dimensions which are liquidity risk, credit risk, and capital risk, while climate risk is represented by physical risk and transition risk. This study also adds bank size, profitability, and economy as the control variables. Unbalanced panel data of 75 listed banking institutions between 2010 and 2024 from 10 selected countries have been arranged and go through preliminary tests to check for robustness and validity. In accordance with the Hausman Test, this study uses Fixed Effect Model (FEM) to examine the relationship of the variables. The results reveal that capital risk has a significant negative impact on ESG performance, whereas liquidity and credit risks are positive but insignificant with the bank’s ESG performance. Transition risk, proxied by fossil fuel energy consumption, shows a strong negative relationship with ESG performance, while physical risk is found to have insignificant relationship with ESG performance. Among the control variables, bank size positively and significantly influences ESG performance, confirming that larger banks possess greater resources to implement sustainable strategies. The findings suggest that robust capitalization and reduced reliance on carbon-intensive sectors would enhance bank’s ESG outcomes. The study makes contribution to a broader literature on sustainable banking through the inclusion of regional evidence from APAC and offers policy recommendations to strengthen the integration of financial and climate risk management in the world of banking.