A Review of ESG Integration and Climate Risk Disclosure Effects on Bank Valuation and Financial Stability

Environmental, Social, and Governance (ESG) integration and climate risk disclosure have emerged as central elements shaping modern banking strategy, regulatory oversight, and investor decision-making. Increasing exposure to climate-related financial risks, including transition risks from decarbonization policies and physical risks arising from extreme environmental events, has intensified the need for transparent sustainability reporting within the banking sector. This review paper synthesizes existing empirical and theoretical literature examining how ESG adoption and climate risk disclosure influence bank valuation, market performance, and systemic financial stability. The study evaluates competing perspectives regarding whether ESG practices primarily function as risk-mitigation mechanisms, reputational signaling tools, or drivers of long-term financial performance. The review analyzes evidence from developed and emerging financial markets, focusing on valuation channels such as cost of capital, asset pricing efficiency, credit risk assessment, and investor confidence. It further explores how climate disclosure frameworks, including scenario analysis and stress testing, reshape risk management practices and regulatory supervision. Particular attention is given to the interaction between ESG transparency and macroprudential stability, highlighting how improved disclosure reduces information asymmetry, enhances market discipline, and supports resilience against climate-induced financial shocks. Additionally, the paper examines methodological approaches used in prior studies, including panel regression, event studies, ESG scoring models, and climate stress-testing frameworks, identifying inconsistencies in measurement and reporting standards that affect comparability of findings. The review concludes by outlining policy implications for regulators and banking institutions, emphasizing harmonized disclosure standards, improved ESG metrics, and integration of climate risk into core financial decision systems. Overall, the paper positions ESG integration and climate risk disclosure as evolving determinants of sustainable bank valuation and long-term financial system stability.