Climate and environmental risk: A new challenge for Vietnamese commercial Bannks’ performance

Abstract

Climate change and environmental risks are increasingly becoming important factors affecting bank operations and profitability. The research “Climate and Environmental Risk: A New Challenge for Vietnamese Commercial Banks’ Performance” analyzed the impact of climate change and environmental factors on the profits of Vietnamese banks, particularly in the context of challenges faced by the Vietnamese economy such as natural disasters, floods, and other environmental events. This study used annual data from public financial reports of 30 commercial banks in Vietnam from 2019 to 2023, including state-owned banks, joint-stock commercial banks, joint venture banks, and 100% foreign banks. The climate data comes from the WMO and the Vietnam Hydrological and Meteorological Service, as well as disaster information from the World Bank and the Vietnam Bureau of Statistics. Macroeconomic data, including GDP and inflation, comes from the IMF, the World Bank, and the National Bureau of Statistics of Vietnam. The annual industry carbon dioxide emissions data comes from Vietnam's energy statistics report and national greenhouse gas report. These pieces of information are used to measure the environmental and climate risks faced by banks. The findings strongly support two main hypotheses. The results provide a comprehensive view of the relationship between financial factors, climate risks and commercial bank profitability. Specifically, as NPLs increase, banks face debt servicing costs and asset losses, which increase credit risk and directly affect operating efficiency. Banks are more exposed to climate risks when carbon emissions increase, as this not only increases climate shocks but also increases credit losses as corporate clients operating in high-emission industries face switching costs and regulatory risks. Meanwhile, natural disasters have a negative coefficient, indicating that natural disasters reduce bank profitability, as they cause large collateral losses and affect customers’ ability to repay loans, especially in vulnerable areas