Climate-resilient banking: a comprehensive framework for optimizing industrial sector loan portfolios

This study underscores the critical significance of climate-related risks within the banking and industrial sectors, emphasizing the need for a climate-resilient response system and strategic loan portfolio planning. It introduces an efficient methodology for identifying key climate-linked risks (CLRs) across the impacted sectors, capturing their diverse impacts, quantifying them and subsequently designing optimal loan portfolios. A comprehensive review of the literature and primary responses from CLR experts, coupled with secondary data sources, forms the basis of our analysis. Initially, CLR impacts were categorized into push and pull indicators based on empirical weighted averages. Subsequently, fuzzy logic theory was employed to quantify CLRs in the form of composite index across industries. Finally, the study proposes portfolio planning for banks using the mean variance portfolio. The proposed control approach assesses sectoral severity, prioritizes sectors, identifies root causes and recommends cost-effective strategies, thus enhancing the overall resilience of the banking ecosystem.