Climate-Related Communication of Central Banks and Systemic Risk

This study examines the influence of green rhetoric from central banks on banking institutions. Using data from 489 publicly listed banks in 47 countries from 2000 to 2023, we find that a greater proportion of climate-related discourse in central bank speeches is positively correlated with lower systemic risk among banks. This may be because communication acts as a signaling mechanism, conveying the anticipated direction of regulatory policy and supervisory priorities, and the extent to which environmental risks are integrated into financial stability frameworks. Effective climate communication reduces ambiguity, encouraging banks to promptly incorporate climate risks into credit assessments and financial risk management, while enabling the gradual repricing of exposures to climate-sensitive assets, with a beneficial effect on their systemic behavior. Moreover, the risk-mitigating benefits of central banks engaging in climate-related matters are more significant for banks with above-median annual changes in the environmental score, as well as for those operating in jurisdictions with narrower central bank mandates, more stringent climaterelated financial policies, lower adaptive capacity to climate hazards, higher carbon intensity, and elevated levels of economic policy uncertainty, stock market volatility, and financial stress. The findings of this study carry substantial policy implications within the context of central banks' expanding involvement in climate-related issues and their subsequent influence on market participants' perceptions.