The Nexus between Climate Risk and Financial Performance of Selected Universal Banks on Ghana Stock Exchange
Kwadwo Ofori-Frimpon *
Department of Accounting Studies Education, University of Skills Training and Entrepreneurial Development, Kumasi, Ghana.
*Author to whom correspondence should be addressed.
Abstract
Climate risk has become an important issue in financial-sector analysis because it may affect bank operations, borrower capacity, credit quality, and overall financial performance. This study examined the nexus between climate risk and the financial performance of selected licensed universal banks in Ghana. The study covered a fifteen-year period, from 2010 to 2024, and was restricted to ten universal banks based on data availability and convenience. Bank financial performance was proxied through a Financial Performance Index derived from net interest margin, return on assets, return on equity, and liquid funds to total assets using Principal Component Analysis. Climate risk was measured using the Climate Risk Index, while bank size, leverage, real GDP growth, and inflation were included as control variables. The study employed a panel data regression approach and used the Generalized Least Square Regression method to control for autocorrelation and heteroskedasticity in the panel data. The results showed that climate risk has a significant negative impact on the financial performance of selected licensed universal banks in Ghana. The findings suggest that climate-related risks may reduce bank performance by affecting bank operations, borrowers, and the wider business environment. The study recommends improving climate prediction, strengthening energy conservation measures, and enhancing emissions-reduction policies.
Keywords: Climate risk, bank financial performance, universal banks, Ghana Stock Exchange, financial performance index, Principal Component Analysis, Generalized Least Square Regression, climate risk index, bank profitability, panel data