Developing an Original Framework for Climate-Related Financial Risk Assessment in the Nigerian Banking Sector

Climate-related financial risks, encompassing physical risks from weather events and transition risks from decarbonisation policies, are an emerging challenge for the Nigerian banking sector, yet no conceptual or empirical framework calibrated to Nigerian financial and climate conditions exists in the academic literature. This study develops an original framework for climate-related financial risk assessment in the Nigerian banking sector, integrating environmental economics, credit risk modelling, and scenario analysis methodology. The theoretical framework distinguishes between physical risk transmission channels (through agricultural loan portfolio performance, infrastructure loan collateral degradation, and insurance loss cascades) and transition risk channels (through oil sector stranded asset exposure and carbon regulation-linked loan default risk). An original Climate-Related Banking Risk Assessment Matrix is developed and applied to nine commercial banks with available data. Physical risk exposure was measured using Niger Delta flood risk mapping overlaid on bank branch and collateral locations from Central Bank of Nigeria data. Transition risk was measured by each bank's oil and gas sector loan concentration. Climate scenario analysis using the Network for Greening the Financial System scenarios was adapted for Nigerian sectoral emission profiles. Results show that six of nine sampled banks have material physical risk exposure concentrated in their Niger Delta branch networks and agricultural portfolios. Transition risk is most significant for banks with oil sector loan concentrations above 25%. The study makes an original contribution by creating the first Nigerian-calibrated climate financial risk assessment framework and proposes mandatory climate risk disclosures for systemically important banks.

Keywords: climate-related financial risk, physical risk, transition risk, banking sector, Nigeria