Development of comprehensive frameworks for managing climate-related risks in banking portfolios

Posted: Oct 28, 2025

• Dr. Prof. Ava Wei
• Dr. Prof. Benjamin Chen
• Dr. Prof. Benjamin Mendes

Abstract

The global financial system faces unprecedented challenges from climate change, with banking institutions particularly exposed to both physical and transition risks that traditional risk management frameworks are ill-equipped to address. Current approaches to climate risk assessment in banking portfolios remain fragmented, often treating climate factors as externalities rather than integral components of financial risk. This research addresses this critical gap by developing a comprehensive, integrated framework that bridges climate science and financial risk management. The novelty of our approach lies in its holistic treatment of climate risks as dynamic, interconnected systems rather than isolated variables, enabling banks to better anticipate and mitigate climate-driven financial vulnerabilities. Climate-related risks manifest in banking portfolios through multiple channels, including direct physical damage to collateral assets, regulatory changes affecting carbon-intensive industries, and broader economic disruptions from climate-induced supply chain interruptions. Traditional risk models, which rely heavily on historical data and static assumptions, prove inadequate for capturing the non-linear, forward-looking nature of climate impacts. Our framework introduces a paradigm shift by incorporating climate scenario analysis, dynamic stress testing, and machine learning techniques to create a more robust and adaptive risk management system.