The management adage “What gets measured gets done” is playing out as banks fall in step with regulatory pressure on tackling climate change. A recent paper co-authored by Wharton accounting professor Luzi Hail shows how mandated climate stress tests increased transparency at major banks in the E.U. and the U.K. in their reporting of climate risks and led to a reduced climate risk exposure in their loan portfolios.
In 2019, European banking regulators introduced climate stress tests, which required banks to methodically collect data and measure climate risk in their lending portfolios. “The stress tests could act as change agents for banks to become more aware of climate risks in their portfolios and to integrate them into their financial risk management,” said Hail. Along with three co-author experts from the University of Mannheim in Germany — Jannis Bischof, Vincent Giese, and Gerrit von Zedlitz — Hail analyzed data from the 230 largest European banks from 2017 to 2022. The study’s sample consisted of 55 banks that were subject to the tests — the “treated group” — and 175 banks that served as the “control group.” The authors showed that the treated group increased transparency by between 16 and 18 percent relative to the control group.
Next, the study focused on the stress-tested banks’ borrowers — around 66,000 mostly private corporate clients. By forcing banks to be more transparent, the study posited, climate-risk policies would trickle down to bank borrowers and lead them to adjust their operations to a low-carbon economy. The banks subject to climate stress tests — and only those — imposed funding and investment constraints on high-risk borrowers that faced significant risks in transitioning to low-carbon operations.
“We clearly see a link between banks being more conscientious about their lending to borrowers with high climate risks and these borrowers being constrained in their growth,” said Hail. “But we only find these effects for a small subset of banks that have good reasons to implement changes.”
One unintended outcome of the climate stress tests is that high-risk borrowers take their business to less committed and less tightly regulated banks. “If anything, borrowers from exempted banks expand their long-term loan financing after the climate stress tests,” the paper stated.
In the U.S., large banks with more than $10 billion in assets are required to conduct annual stress tests to check their ability to withstand recessions and severe economic downturns. Hail didn’t expect U.S. regulators to mandate climate stress tests on banks anytime in the foreseeable future.
Nonetheless, Hail does anticipate that European authorities will continue their push. “Regulators, central bankers, and politicians see climate stress tests as one way to nudge corporations towards a less carbon-intense, greener economy,” he said. “However, our study shows that whether such policies succeed heavily depends on what incentives are in place for these banks.”
Published as “Can Banks Impact Climate Consciousness?” in the Spring/Summer 2026 issue of Wharton Magazine.
