Determinants of Global Banks’ Climate Information Disclosure with the Moderating Effect of Shareholder Litigation Risk

Abstract

This paper explores the influence of a country’s institutional factors and internal corporate governance on banks’ voluntary climate finance disclosures. The analysis focuses on the world’s top 100 banks, examining the institutional and governance factors that shape TCFD disclosure practices. From an institutional perspective, the research reveals a heightened level of climate financial disclosure in banks located in countries where investor protection is strong under the common law system and environmental performance is commendable. On the internal governance front, it is observed that the independence and diversity of the board of directors play a facilitating role in promoting such disclosure. Additionally, in countries where shareholder litigation is easily pursued, a moderating effect is observed wherein board independence paradoxically inhibits TCFD disclosure. This study stands as the first to explore the determinants of climate financial disclosure in global banks, confirming the driving forces behind such disclosures through institutional and stakeholder theories and providing crucial empirical evidence to enhance research on voluntary disclosure.

1. Introduction

Climate change is increasingly raising awareness of a crisis that is expected to cause more devastating economic consequences than any economic crisis humanity has experienced to date. Institutions responsible for managing and supervising the financial system recognize that this climate change issue will soon lead to a crisis within the financial system itself, and they are taking measures to prevent this CATASTROPHE. Examples of such measures include the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) by the Financial Stability Board in 2015, the formation of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) by central banks and financial supervisors in 2017, and the issuance of the Green Swan report by the Bank for International Settlements (BIS) in 2020.

In the corporate management context, the issue of climate change has shifted from being primarily seen as a corporate social responsibility concern to a financial risk management issue. Since the publication of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations in 2017, IFRS, the EU, and the U.S. SEC have been developing their own sustainability reporting standards by incorporating the TCFD disclosure framework. The EU has introduced the concept of dual materiality in sustainability disclosures. While it is important in sustainability reporting to transparently disclose how companies have impacted society and the environment (impact materiality), the EU’s Corporate Sustainability Reporting Directive (CSRD) also requires companies to disclose information on how their financials will be affected by environmental changes due to climate change (financial materiality). Furthermore, climate disclosures under IFRS and the U.S. SEC are more focused on financial materiality than impact materiality, indicating a shift in the focus of climate change issues to financial issues.

In the past, banks have received relatively less attention regarding their climate change response due to their lower direct emissions of greenhouse gases compared to other industries. However, this has led to a significant underestimation of the importance of banks’ climate change response. Banks play a crucial role in our society as financial intermediaries, pricing and valuing financial assets, monitoring borrowers, managing financial risks, and organizing the payment system [1]. They can contribute to the transition to a sustainable low-carbon economy through functions such as allocating funds, managing portfolios, and risk management [2]. The Principles for Responsible Banking (PRB) by UNEP FI also emphasize the pivotal role of banks as the backbone of the economic system in spreading positive impacts on society and the environment through business strategies, products, and services while minimizing negative impacts.

And just because banks do not have significant direct greenhouse gas emissions does not mean they are free from being responsible for climate change. This is because banks, through their lending, investment, and other funding decisions, have a substantial impact on climate change as financial service providers. Therefore, the GHG Protocol includes financial emissions as a separate category in measuring indirect Scope 3 emissions, and initiatives like PCAF (Partnership for Carbon Accounting Financials) are developing sophisticated criteria for calculating the emissions associated with banks’ financial activities.

Furthermore, banks should prioritize addressing climate change as part of their financial strength management. Bank loans not only have an impact on the environment but also expose banks to risks stemming from it [3,4]. If the companies that banks finance are exposed to climate change risks and fall into financial distress, this becomes a financial risk for the bank. In other words, as companies are increasingly exposed to physical and transitional risks associated with climate change, banks that lend them money also share those risks. Therefore, banks need to actively respond to climate change from a financial strength perspective.

However, despite the importance of climate change adaptation for these banks, they have often failed to recognize it themselves [5]. This has also been the case in academic research, where financial institutions such as banks are often excluded as subjects of analysis in many empirical studies on corporate climate change adaptation [6,7,8,9,10,11,12,13].

Therefore, this study aims to fill this research gap by identifying the determinants of banks’ climate change responses through an empirical analysis of global banks. The main research questions of this paper are as follows:

• What are the institutional and governance factors that promote voluntary climate-related financial disclosures by banks?
• If internal corporate governance within banks influences climate finance disclosure, are there external factors that moderate the extent of this influence?

The objective of this paper is to identify institutional and governance factors that encourage banks to voluntarily disclose climate-related financial information and to observe the various forces that promote or hinder such disclosures. Through this analysis, regulatory authorities overseeing financial risks and policymakers aiming to achieve low-carbon goals can gain insights into effective approaches to promoting climate-related financial disclosures by banks.

In this paper, we focus on the top 100 global banks by assets and measure the extent of the TCFD climate-related financial disclosures over a two-year period from 2020 to 2021. The analysis aims to examine the institutional and governance factors driving these disclosures. Since the release of the TCFD recommendations in 2017, there has been a gradual increase in companies aligning their disclosures with these guidelines. However, measuring the financial risk of climate change is a highly uncertain endeavor that requires many assumptions about the future, and there are many challenges to fully implementing the TCFD’s recommendations. Therefore, even counting the disclosure of various specific elements required by the TCFD can provide a discerning evaluation of banks’ TCFD disclosures. Additionally, as the study period predates the mandatory implementation of TCFD disclosures in 2020–2021, it allows for an easier observation of the characteristics of internal governance that promote voluntary disclosures within banks. This work will contribute to the existing literature on the relationship between voluntary disclosures and governance.

The research findings indicate that voluntary TCFD disclosures by banks are more prevalent in countries with strong investor protection and favorable environmental performance. Furthermore, it was observed that greater board independence and diversity are associated with increased levels of TCFD disclosures. However, in countries with easy shareholder litigation, there was a tendency for non-executive directors to oppose TCFD disclosures, contrary to expectations. Unexpectedly, the size of the board and CEO authority did not have a significant impact on TCFD disclosures, which was contrary to our anticipated results.

This study fills a significant research gap in the field of banks’ response to climate change. Firstly, it is the first study to investigate voluntary climate-related financial disclosures in global banks. Secondly, it expands the scope of corporate climate disclosures from greenhouse gas emission information and participation in initiatives like the Carbon Disclosure Project (CDP) to TCFD climate-related financial disclosures. Thirdly, it highlights a distinct aspect by demonstrating the moderating effect of the ease of shareholder litigation, a country-specific variable, on the function of independent directors, which is considered an effective governance mechanism. This finding sets this study apart from previous research on climate-related actions.

Section 2 will review the theoretical background and prior research on banks’ climate disclosures. In Section 3, hypotheses will be developed regarding the institutional and governance factors that promote voluntary TCFD disclosures in banks. Section 4 will present our research methodology, while Section 5 will present our empirical findings. Finally, Section 6 will provide a conclusion, wrapping up this paper.

2. Theoretical Background and Literature Review

2.1. Research on Voluntary Disclosure

Corporate disclosure is an important means for management to communicate the firm’s performance to external investors [14]. Theoretically, increased corporate disclosure reduces investors’ transaction costs, enhances liquidity, and reduces uncertainty regarding outcome distribution, thus mitigating adverse selection issues [15]. Researchers interested in corporate disclosure have primarily studied disclosure regulations to mitigate agency problems, the effectiveness of auditors and information intermediaries in enhancing the reliability of disclosures, the factors influencing managerial disclosure decisions, and the economic consequences of disclosure [14].

The term voluntary disclosures include all forms of disclosures that are not explicitly required by the generally accepted accounting principles (GAAP) or a specific country’s rules [16]. Therefore, voluntary disclosures cover a wide range of topics and formats. Meek et al. [17] categorized the types of voluntary disclosures into strategic, financial, and non-financial information. They found that voluntary disclosures are strongly influenced by factors such as firm size, country or region, listing status, and industry. However, they noted that the importance of these factors varies depending on the type of information disclosed [17].

While research on voluntary disclosure requires a detailed analysis based on the types of disclosed information, previous studies have mainly focused on disclosures targeting investors, with limited research conducted on other stakeholders [14]. Moreover, the field of research on climate disclosures remains largely unexplored.

2.2. Motivations and Determinants of Voluntary Climate Disclosure by Companies

Climate disclosure refers to the act of disseminating information about a company’s response to climate change to the public. Researchers have shown interest in climate disclosures since 2005, when the Kyoto Protocol came into force. Previous studies have primarily focused on the motivations and determinants behind managerial decisions to engage in voluntary climate disclosures [18]. Researchers have explored these motivations through institutional theory, stakeholder theory, legitimacy theory, and economic-based theories on voluntary disclosure [18].

Institutional theory explains that companies engage in climate disclosure because they are pressured by the wide range of political and economic institutions surrounding them [19]. An institution is an established order which comprises regulatory, normative, and cultural-cognitive elements that are embedded within extensive political and economic institutions [19]. Organizations reflect the institutionalized elements in their structure to gain legitimacy with respect to their organizational activities [20]. Institutionalized elements become integrated into the organizational structure through processes of coercive, mimetic, and normative isomorphism, which change the structure of organizations to align with the institutional environment [21]. Therefore, country-level institutional differences in aspects such as the political, financial, or legal systems upon which companies are based can influence the level and types of disclosures they make [22]. Factors such as the intensity of carbon regulations in the country or industry, competitors’ responses to climate change, pressure from various stakeholders, the emergence of global climate disclosure initiatives, and the adoption of disclosure standards can all influence a company’s climate disclosure practices.

According to stakeholder theory, companies engage in climate disclosure because they respond to the demands of their various stakeholders. Stakeholders refer to any group or individual who can affect or is affected by the achievement of an organization’s goals. Stakeholder theory argues that when companies act in the interests of all stakeholders, it can lead to improved financial performance. Therefore, ethical behavior and profitability are not mutually exclusive [23,24]. Parmar et al. [23] view business as a set of relationships among groups that have a stake in the activities that make up the business. In other words, understanding business is about knowing how these relationships work and change over time as they collectively create and transact value among customers, suppliers, employees, funders (shareholders, creditors, banks, etc.), communities, and managers. Stakeholders can influence financial outcomes by strengthening regulations, withholding legitimacy, or delaying business transactions [25]. Consequently, executives and shareholders, who value stock prices, strive to avoid such sanctions from stakeholders for their own interests [26]. After all, when companies are aligned with the expectations of diverse stakeholder groups, they can better predict risks and ultimately create stable value for both shareholders and stakeholders [27]. Therefore, according to stakeholder theory, companies engage in voluntary climate-related disclosure because climate change has emerged as an urgent social issue, and various stakeholders demand information on companies’ responses to climate change.

Legitimacy theory explains that companies engage in climate disclosure to secure the legitimacy of their operations. According to this theory, voluntary disclosure is a means for companies to maintain an implicit social contract with society. If this contract is violated, companies may face increased scrutiny or the emergence of coercive regulations, prompting them to engage in voluntary disclosure to avoid such consequences [28]. Stanny [29] empirically confirmed that while companies respond to surveys from initiatives like the Carbon Disclosure Project (CDP), they tend to withhold detailed information such as data on emissions and methodologies, using carbon disclosure as a means to evade in-depth investigations. Furthermore, existing research has observed that larger companies tend to engage in more climate disclosure [6,8,16,29]. Legitimacy theory interprets this as larger companies being more noticeable and thus subject to greater social scrutiny, leading them to seek legitimacy through climate disclosure.

The economic-based theory of voluntary disclosure suggests that companies engage in climate disclosure voluntarily when the benefits outweigh the costs of such disclosure. Based on their assessment of the costs and benefits, companies determine that it is advantageous to disclose information to stakeholders. Economics-based studies of voluntary disclosure views voluntary disclosure as a means for companies to differentiate themselves from firms with poor performance by highlighting their positive performance [12,30]. Therefore, companies with good climate change performance should voluntarily disclose climate information to inform investors and other stakeholders about their strategies. The tendency for environmentally high-performing companies to engage in more disclosure provides empirical support for the economic-based theory of voluntary disclosure [12].

2.3. Corporate Governance and Voluntary Disclosure

Corporate governance is the system of laws, regulations, institutions, markets, contracts, and corporate policies and procedures (such as the internal control system, policy manuals, and budgets) that directly influence the actions of the top-level decision makers in the corporation [31]. Therefore, corporate governance has an impact on a company’s voluntary disclosures, and the relationship between the two has been the subject of relatively active research [16,32]. Corporate governance is also a significant point of focus in research on climate disclosures [7,33,34,35,36]. In their review of the literature on climate disclosure, Velte et al. [26] classified governance variables into firm-level and country-level dimensions.

The board of directors is the most prominent mechanism in firm-level governance. Velte et al. [26] found that among the firm-level governance variables of the board of directors, ownership structure, and stakeholder pressure, the board of directors is the most influential governance mechanism. In modern publicly traded companies, where ownership and management are separated, the board of directors plays a crucial role in addressing the agency problem caused by information asymmetry between managers and shareholders [37,38]. Therefore, an effective board of directors can mitigate agency problems by monitoring managers. Additionally, the board of directors serves as a mediator for the demands of the various stakeholders surrounding the company [39]. As the highest decision-making body of the firm, the board is responsible for representing the interests of both the firm’s shareholders and its stakeholders, in line with stakeholder theory, which states that a firm acting in the interests of all stakeholders will ultimately increase the firm’s financial performance [40,41]. Therefore, the board of directors must strike a balance of interests among diverse stakeholders and produce and communicate information regarding it to stakeholders [7]. An effective board of directors is expected to enhance transparency, mitigate agency costs, and secure the legitimacy of corporate activities through disclosing information on socially responsible activities that consider the interests of various stakeholders [9].

Research focusing on the role of the board of directors has primarily examined boards’ sizes, independence, and diversity, as well as the CEO’s power. In a meta-analysis of 88 articles on the relationship between board characteristics and CSR disclosure, Guerrero-Villegas et al. [42] concluded that board size, independence, and diversity are positively related to CSR disclosure, while strong CEO power is negatively related. Similar trends have been reported in studies investigating the impact of the board of directors on climate disclosure [26].

According to the agency theory, the independence of the board of directors is considered the most important variable. Numerous studies have primarily measured the independence of the board by examining whether its members are composed of individuals who are independent of the management. Generally, the independence of the board is recognized as promoting voluntary disclosure, although cases where this is not the case are frequently found. The reason is that outside directors are not a homogeneous group, as the members of the board may have various interests, and their decision-making power may vary. Therefore, differences in decision making may occur depending on the type of independent directors [13,43], the content of the information to be disclosed [40], the ownership structure of the firm [9,44], the industry in which the firm operates [7], or the country’s institutional factors [45].

For example, Lim et al. [40] found that in Australia, independent directors encouraged the disclosure of forward-looking and strategic information but did not engage in the disclosure of non-financial information such as information related to social responsibility. Haniffa et al. [45] observed that independent directors in Malaysian firms hindered social responsibility disclosures, suggesting that independent directors’ values may not be aligned with other stakeholders. In addition, independent directors have been found to oppose voluntary disclosure in environmentally sensitive industries [7]. Prado-Lorenzo et al. [7] argue that this is because independent directors make decisions based on their perception of litigation risk. According to Fuente et al. [13], who studied the case of Spain, outside directors who also owned company shares strongly influenced the adoption of GRI (Global Reporting Initiative) guidelines in sustainability reporting. Fuente et al. [13] emphasized that understanding the institutional context of Spain, where outside directors with ownership stakes are prevalent, is necessary to accurately interpret the positive impact of outside directors on the transparency of sustainability reporting.

In order to provide an in-depth explanation for the effect of internal corporate governance on voluntary disclosure, several studies have examined the moderating effects of various factors, including institutional factors. Cheng et al. (2006) found that the propensity of independent directors to promote voluntary disclosure varied across regulatory regimes in a study of Singaporean firms [46]. Prado-Lorenzo et al. [7] conducted an in-depth analysis of the moderating effects of litigation risk in the industry, the enforcement intensity and public pressure in the country, and the legal origins of various governance characteristics. Guerrero-Villegas et al. [42] observed that the influence of the board of directors on CSR disclosure is stronger in countries with low levels of commitment to sustainable goals, suggesting that when external governance mechanisms such as regulatory frameworks fail, internal governance mechanisms in companies play a complementary role.

Country-level governance variables of interest include the origin of the legal system and the strength of legal enforcement, both of which have been found to have a significant impact on climate disclosure [26]. For example, Grauel et al. [22] observed significant variations in the response rates to the Carbon Disclosure Project (CDP) among companies across different countries. Their analysis of the national contexts in which companies participate in the CDP revealed that companies from countries with stricter environmental regulations and stronger investor protection through common law systems had higher participation rates [22]. Luo et al. [8] also found that companies from countries with stricter environmental regulations and common law systems had higher participation in the CDP. The transparency of climate disclosure is also influenced by institutional factors at the national level. While companies from common law systems were more active in participating in the CDP, civil law systems showed greater concern for transparency in sustainability reporting [47]. Simnett et al. [47] analyzed the verification practices of sustainable reporting across 31 countries and found a strong association between stakeholder orientation and the verification of sustainability reports in civil law countries, where audit firms were chosen as verification specialists. Garcia-Torea et al. [48], focusing on companies from 17 countries, also found that companies from civil law systems had higher transparency in sustainable reporting. Additionally, studies have reported that companies headquartered in countries that ratified the Kyoto Protocol engage in more environmental disclosure compared to companies in non-ratifying countries [19,49], and companies from developed countries disclose more information on climate change compared to those from developing countries [50,51]. These findings support the argument that the institutional factors formed within a country can influence companies’ decision making regarding climate disclosure.

2.4. Voluntary Climate-Related Disclosure by Banks

As researchers often exclude the financial sector from their samples when studying corporate voluntary climate-related disclosure, there is a significant lack of research on this field by banks compared to other industries. This is partly due to the relatively low levels of direct carbon emissions from banks and the presence of distinct criteria and operational rules that differentiate them from other industries, making it difficult to control for these influences [13]. Therefore, caution should be exercised when generalizing the findings of prior research on voluntary climate disclosure by companies to the banking industry.

Previous studies on voluntary disclosure in banks have mainly focused on the relationship between board characteristics and CSR disclosure. Previous studies on voluntary disclosure by banks have primarily focused on the relationship between board characteristics and CSR disclosure. Jizi et al. (2013) analyzed the impact of board independence and size on CSR disclosure among large US banks and found that boards with higher proportions of outside directors and larger sizes tend to engage in better CSR disclosure [52]. Bose et al. [53] investigated the influence of regulatory factors and board characteristics on green banking disclosure in Bangladesh banks. Following the establishment of the green banking guidelines by the central bank in Bangladesh in 2011, banks started actively engaging in green banking disclosure. It was found that larger board sizes and higher institutional ownership led to higher levels of green banking disclosure. However, the presence of outside directors on the board did not have a significant impact on green banking disclosure.

In addition, there are several previous studies that examine the impact of bank boards on CSR disclosure, and many of these studies focus on banks in a single country, including Kenya [43], Bangladesh [53,54], Malaysia [55], the United States [52], Turkey [56], and Spain [57]. The findings of these studies indicate that banks tend to engage in more CSR disclosure when they have larger board sizes [43,52,53,55], higher board independence [43,52,54,55,56,57], and a higher proportion of women directors [43,56,57]. Through these findings, we can conclude that bank boards also have an influence on voluntary CSR disclosure. However, it is important to note that the impact of board characteristics on CSR disclosure is not consistently observed across all studies, indicating the need for further in-depth research to identify the underlying causes for these inconsistencies.

Moreover, there is little evidence regarding the influence of governance on climate disclosure in banks. Studies on climate disclosure in banks are scarce [51,58,59], and among them, Cosma et al. [58] is the only study that focuses on the influence of governance. Cosma et al. [58] analyzed the impact of the CSR committee of the board of directors on TCFD climate financial disclosure in 101 banks in Europe. The presence of a CSR committee showed a significant difference in TCFD climate disclosure, and it was found that having a higher number of female directors and a larger board size resulted in better TCFD disclosure. However, independent directors did not have an impact. Kilic et al. [11] stated that banks in Turkey make more climate disclosures when they are larger, more profitable, have dispersed ownership, and are listed or have multiple listings. According to Caby et al. [51], who focused on banks in 40 countries, the banking strategies, economic and financial patterns in the country where a bank operates influence the quality of carbon disclosure by banks. This aligns with the institutional theory’s argument that national variables influence individual firms.

In summary, our current knowledge regarding the determinants that promote voluntary climate disclosure in banks is limited. While there are a few studies that expand the research scope to include CSR disclosure rather than climate disclosure, even those studies are confined to single-country investigations. Furthermore, careful consideration should be given to determine whether the research findings on CSR disclosure can be cautiously extended and applied to TCFD disclosure. Climate-related disclosure prior to the emergence of the TCFD recommendations primarily focused on disclosing information related to greenhouse gas emissions or methodologies, aligning with the nature of socially responsible disclosure that emphasizes the significance of a company’s environmental impact on society. However, TCFD disclosure shifted its focus to the financial significance of climate change impacts on businesses, aligning itself more with financial disclosure. Therefore, TCFD disclosure is expected to garner greater interest from stakeholders such as shareholders and investors who are sensitive to financial performance. Consequently, separate research is required to examine the influence of governance on voluntary disclosure, specifically in the context of TCFD disclosure, which differentiates itself from CSR disclosure.

3. Hypothesis Development

3.1. Institutional Variables and TCFD Disclosure

According to La Porta et al. [60], the origins of a country’s legal system are crucial institutional factors that shape the attitude towards the state’s market and determine how companies raise capital. These legal origins can be broadly categorized into the English-origin common law system and the Roman-origin civil law system. La Porta et al. [60] found that there are variations in the level of protection for investors and creditors based on these legal origins, with countries following the common law system offering the strongest legal protection for investors. Moreover, they noted that these characteristics contribute to differences in funding methods, corporate ownership structures, and corporate governance across different countries.

One of these differences is the approach to addressing information asymmetry between managers and investors and other stakeholders [61]. As empirically confirmed by Beekes et al. [62], companies in common law countries tend to have more extensive disclosure compared to companies in civil law countries, as they seek to mitigate information asymmetry issues. This difference stems from variations in funding methods [62]. The robust investor protection in common law countries has facilitated the development of capital markets, enabling companies to more easily raise the funds necessary for their operations. Investors demand higher levels of disclosure from companies to obtain the information necessary for investment decision making, and companies, in turn, establish transparent financial reporting systems to attract investment capital. As a result, a culture of voluntary disclosure has developed in common law countries [14]. In contrast, companies in civil law countries tend to rely more on the banking market rather than the capital market for funding [63]. In this case, banks, acting as financial intermediaries, undertake the role of delegated monitors on behalf of depositors and retail investors [64]. Additionally, the internal governance structures of companies in these countries involves representatives appointed or elected on behalf of various stakeholders, who gain access to information about corporate management through private ‘insider’ channels [61]. Therefore, companies in civil law countries with established stakeholder governance structures have a lower reliance on disclosure compared to common law countries [62].

There is also a distinct difference in the extent to which legal enforceability is granted to corporate social responsibility in common law and civil law countries. According to Erragragui et al. [65], in common law countries, companies address issues of social responsibility in the form of voluntary compliance with non-binding norms such as international standards [65]. The realm of social responsibility is discretionary for companies in common law countries, and they choose to comply with relevant standards or participate in initiatives voluntarily, subject to the choices of investors and stakeholders. In contrast, civil law systems rely on more systematic mechanisms with binding force to regulate the external social effects of corporations. Civil law countries impose explicit obligations of social responsibility on companies by predefining and controlling behaviors that align with stakeholder perspectives.

The differing levels of enforceability in terms of investor protection and corporate social responsibility between common law and civil law systems are likely to lead to variations in companies’ responses to TCFD climate financial disclosure. In common law countries where a culture of voluntary disclosure for investor protection has been established, it is anticipated that companies in these jurisdictions will engage more extensively in TCFD disclosure. However, given the stakeholder-centric focus of TCFD in addressing climate change issues, there is also a driving force for TCFD adoption in civil law countries. Nevertheless, due to the more rigid regulatory systems in civil law countries, the voluntary nature of TCFD guidelines has not yet generated the same level of momentum for adoption among companies in jurisdictions where disclosure is not yet mandatory. Therefore, it is expected that voluntary TCFD disclosures by banks would be more prominent in common law countries.

This is supported by empirical research findings that state that companies in common law countries are more likely to voluntarily engage in carbon disclosure [8,22]. Therefore, based on these findings, this paper predicts that companies in common law countries will disclose information more extensively, even in the context of TCFD disclosure. Accordingly, the following hypothesis is proposed:

H1. 

Banks located in common law countries will have a higher volume of TCFD disclosures.

Similarly, it has been empirically confirmed that firms in countries with stricter environmental regulations or higher environmental performance tend to disclose more climate-related information [6,8]. Grauel et al. [22] investigated the determinants of companies’ participation in the Carbon Disclosure Project (CDP) across 51 countries and found that companies’ CDP participation significantly increases as the environmental regulations in their respective countries become more stringent. In a study of banks in 40 countries, Caby et al. [51] found higher Environmental Performance Index (EPI) scores in the countries where the banks in operation are associated with a higher quality of carbon disclosure. Therefore, it can be anticipated that banks, similar to other companies, will actively respond to TCFD disclosure when their host countries prioritize environmental concerns and demonstrate strong environmental performance. Based on this, the following hypothesis can be formulated:

H2. 

Banks located in countries with higher environmental performance will have a higher volume of TCFD disclosures.

3.2. Internal Corporate Governance and TCFD Disclosure

In this study, the focus is on the characteristics of the board of directors, which is the most prominent mechanism in internal corporate governance [26]. There are contrasting perspectives on whether increasing the number of directors in the board enhances its effectiveness. A larger board size can enhance the monitoring function and reduce managerial discretion within the board. Additionally, a large board can benefit from having directors with diverse backgrounds, bringing a wide range of knowledge and introducing various ideas to the company. However, concerns exist that a larger board size may lead to more time-consuming discussions, decision-making processes, and consensus-building, potentially reducing the efficiency of the monitoring role [66]. On the other hand, a smaller board is considered more efficient in decision making but may have a lower capacity in monitoring executives [42]. Empirical research findings on the relationship between board size and voluntary disclosure are mixed, and there is also an argument that an optimal board size exists for efficient board operations, integrating both perspectives [67]. In other words, there is a curvilinear (inverted U-shaped) relationship between board size and performance, where the addition of new directors enhances monitoring and advice to the management up to a certain level, but beyond a certain threshold, company performance decreases.

In the context of CSR and climate disclosure, empirical research on the impact of board size yields conflicting findings. Some studies suggest that a larger board size is associated with better disclosure practices [36,43,44,52], while others observe a tendency for reduced disclosure with a larger board size [7]. Moreover, several empirical studies have found no significant influence of board size on climate disclosure [11,13,50,56,57,68].

Due to the validity and mixed empirical results of each argument, this study takes an exploratory approach regarding the influence of board size on TCFD disclosure in banks and establishes the following hypothesis.

H3. 

Board size will affect the volume of TCFD disclosures.

On the other hand, if the independence of the board of directors is ensured, voluntary disclosure is expected to become more active. The agency theory emphasizes that when the executive is not the owner of the firm, decision control and decision management should be separated [37]. The decision control role of the firm is enhanced when the board is independent from the management. Therefore, the existence of independent directors, that is, directors who are independent of the management, is an essential corporate governance mechanism for monitoring and controlling corporate executives and maintaining the effectiveness of the board of directors [57]. Independent directors who are hired to manage external factors such as the local community are aware of the demands and expectations of the various stakeholders surrounding the company [69]. As watchdogs, independent directors must not only do the right thing but also demonstrate that they are doing the right thing. Therefore, independent directors are more interested in encouraging corporate socially responsible behavior to protect their reputation and professional reputation [13,52,70,71]. Thus, independent directors seek to inform the market that they fulfill their obligations as independent directors by promoting more voluntary disclosure, transparently disclosing the value creation process to other stakeholders [40].

In addition, externally recruited independent directors can provide the organization with new insights into sustainability. According to resource dependency theory, independent directors play a role in expanding the boundaries between the organization and its environment [72]. External directors, as individuals with diverse backgrounds, can have a wide range of experiences and interests [73]. Therefore, they can pursue sustainable development with a long-term perspective beyond the limited focus on financial performance that internal stakeholders may have. As a result, independent directors are expected to challenge the existing decision-making model that focuses solely on economic returns by injecting new insights and perspectives into the environmental and social impacts of the company [74].

Therefore, in this study, it is assumed that the higher the independence of the bank’s board of directors, the more actively they will be interested in climate change and disclose TCFD climate-related financial risks. Based on this assumption, the following hypothesis is proposed:

H4. 

The higher the proportion of non-executive directors on the board, the greater the amount of TCFD disclosure.

Board diversity is an important topic addressed in research on corporate governance. Board diversity is associated with the board composition and the varied combinations of attributes, characteristics, and expertise contributed by individual board members in relation to the board’s processes and decision making [75]. When individual board members have diverse backgrounds and expertise, such boards are more likely to incorporate a wide range of knowledge domains, perspectives, and ideas in the decision-making process [76]. Boards with higher diversity in their composition can represent a more diverse constituency and are more likely to play a mediating role in addressing tensions between financial demands and climate change demands [36].

Diversity within a group can be examined through various criteria, such as gender, age, education, cultural background, nationality, and more. However, in studies related to corporate governance, the representation of women on corporate boards is widely used as the most prominent variable for assessing board diversity. Since corporate boards are typically male-dominated and organizations where women face challenges in advancing, the proportion of women on the board is considered a reflection of the company’s commitment to ensuring board diversity.

Another reason for focusing on women directors is their greater tendency to align with social values. While some studies suggest that there is no difference between men and women in terms of attitudes towards the environment, it has been empirically observed that women tend to have a higher level of interest in environmental issues compared to men [42,76]. According to Ibrahim et al. [77], women directors exhibit a stronger inclination towards corporate social responsibility than their male counterparts. Therefore, women directors are believed to play a significant role in promoting a company’s CSR efforts and enhancing its reputation [78,79].

Therefore, it can be expected that boards with a higher representation of women directors would be more actively engaged in addressing climate change issues and be more proactive in adopting TCFD recommendations. Based on this assumption, the following hypothesis is proposed in this paper:

H5. 

A higher proportion of women directors on the board will be positively associated with a greater quantity of TCFD climate-related financial disclosure.

The effectiveness of a board of directors is influenced by the power of the CEO. When the CEO holds significant power, the board’s ability to effectively monitor management may be weakened, raising concerns about agency problems. The board chairperson has the authority to set the agenda and can influence the content and amount of information provided to other directors. If the CEO also serves as the board chairperson, there is a risk that important information can be easily concealed from other directors. Furthermore, the CEO can exert influence to ensure the appointment of individuals who are favorable to them on the board [10,80], making it difficult for directors to express dissenting views against the CEO’s opinions. As a result, there is a possibility that directors’ decision making may be influenced by the CEO’s views rather than being based on their own rational judgment [52]. Under such a structure, it becomes challenging for the board to effectively perform its role of mediating the demands of various stakeholders.

This has been confirmed in prior empirical studies on voluntary CSR disclosure and climate disclosure. Using a sample of Bangladeshi firms, Muttakin et al. [10] found that independent directors acting as part of the board’s human resources team facilitate CSR disclosure, but conversely, strong CEOs inhibit CSR disclosure. They also observed a moderating effect of strong CEOs that reduces the power of independent directors to facilitate CSR disclosure. This implies that as CEO authority increases, outside directors are unable to express dissenting views regarding CEO decisions related to CSR activities and make decisions to reduce CSR disclosure. Similarly, Guerrero-Villegas et al. [42], in their meta-analysis, found that strong CEOs are averse to CSR disclosure, and the negative impact of CEO power on CSR disclosure is amplified in countries with lower levels of sustainability commitment. Based on these findings, Guerrero-Villegas et al. [42] argued that in countries with a weak focus on sustainability, the separation of CEO and board chairperson roles can serve as a robust governance mechanism to complement this situation.

Therefore, based on the previous discussion, we can anticipate that when the CEO holds the position of board chairperson, the demands of shareholders and various stakeholders to disclose climate-related financial risks may not be given significant attention. Consequently, the following hypothesis is proposed:

H6. 

The volume of TCFD disclosures will be lower when the CEO also serves as the board chairperson.

Institutional factors at the country level influence the effectiveness of internal corporate governance [42,64,81]. Yoshikawa et al. [81] argued that the monitoring and resource provision roles of independent directors vary in effectiveness depending on the level of governance within a particular country. For instance, in countries with a high level of governance and dispersed ownership of companies, independent directors are more likely to perform their functions effectively. On the contrary, in countries with low governance standards and concentrated ownership, independent directors may not be able to fulfill their roles effectively. Therefore, the extent to which independent directors influence TCFD disclosure may also vary depending on the institutional factors of the country.

According to Rose [82], directors operate in high-risk environments where legal threats arise from shareholder litigation and government regulation. For example, in the United States, directors are legally required to exercise due care and diligence towards shareholders, and shareholders often file lawsuits claiming financial harm due to perceived negligence by directors [83]. However, corporate social responsibility is not legally mandated. Therefore, if there is a conflict between shareholders’ interests and social interests, directors may prioritize shareholders’ interests even if they personally recognize that their decisions are ethically questionable, as acting in a socially responsible manner would violate their duty to maximize shareholder wealth. This decision-making process, wherein directors choose prospective rationality to maximize legal protection, is motivated by self-interest [82]. Additionally, Fich et al. [84] found that if a company faces shareholder litigation, the reputation of outside directors is negatively affected, leading to a decrease in the number of outside directorships. The decline in outside directorships following litigation ultimately implies a decrease in the welfare of outside directors, resulting in financial detriments.

Therefore, it can be expected that in countries where shareholder litigation is more prevalent, outside directors may prioritize shareholders’ interests over social responsibility. Prado-Lorenzo et al. [7] empirically demonstrated that boards with higher independence significantly oppose greenhouse gas information disclosure in industries with high litigation risk, suggesting that independent directors are conscious of the risk of litigation when making decisions related to carbon disclosure. Rose [82] pointed out that the recent emphasis on the independence requirements for directors may inadvertently prioritize the maximization of shareholder assets, leading to the unintended consequence of deferring social responsibility. Considering the potential reputational and financial risks associated with litigation, outside directors may adopt a cautious approach towards voluntary disclosures, unless they perceive direct and immediate benefits for shareholders. Thus, it can be anticipated that in countries with a legal environment conducive to shareholder litigation, outside directors may exhibit a less proactive stance towards TCFD climate-related financial disclosure. Consequently, the following hypothesis is proposed:

H7. 

In countries with a higher ease of shareholder litigation, a higher proportion of non-executive directors will be negatively associated with the quantity of TCFD information disclosure.

4. Methodology

4.1. Sample Selection

This study focuses on the world’s 100 largest banks based on asset size. The data for this study were obtained from S&P Global’s “The World’s 100 Largest Banks”. Our analysis included data from two years, 2020 and 2021. Following the release of the TCFD recommendations in 2017, it took some time for companies to prepare for and implement TCFD disclosure and for it to become mainstream among companies. Therefore, the measurement of TCFD disclosure started from 2020 in this study. Moreover, 2021 is the most recent year for which data are available.

This paper validates the aforementioned hypotheses based on a sample of 198 observations from 24 countries, excluding 2 samples where board information was not disclosed.

4.2. Variables and Empirical Model

The definitions of variables used in this paper are as shown in

Table 1. Definition of variables.

	Variable Name	Meaning	Measurement	Source
Dependent variable	TCFD	TCFD disclosure amount	Manually counted, with a value between 0 and 53, depending on the disclosure amount published by the bank	Refers to TCFD reports, non-financial reports, sustainability reports, etc., published by each bank on its website.
Country variable	LEGAL	Country legal origin	Common law countries are assigned a value of 1, while civil law countries are assigned a value of 0	La Porta [60]
	EPI	Environmental Performance Index	EPI ranges from 0 to 100 based on a country’s environmental performance, with higher values indicating better environmental performance	Yale University *
	SUIT	Ease of Shareholder Suits Index	The SUIT index ranges from 0 to 10 based on how likely it is for a plaintiff to recover legal costs in shareholder lawsuits. Higher values indicate a greater likelihood of shareholders in that country recovering costs in litigation	Doing business, World Bank
Firm variables	BSIZE	Board size	Logarithm of the number of directors on the board	Annual Report, SEC Report, Proxy Statement, etc.
	INDEPENDENT	Board independence	Number of non-executive directors on the board/total directors
	DIVERSITY	Board diversity	Number of women on the board/total number of directors
	DUAL	CEO permissions	If the CEO also serves as the chairman of the board, a value of 1 is assigned; otherwise, a value of 0 is given
Control Variables	SIZE	Corporate size	Log assets (million USD)	OSIRIS **
	ROA	Corporate profitability	Net income/assets
	LEV	Debt to equity ratio	Liabilities/assets
	LISTING	Listed	Listed companies are assigned a value of 1, while unlisted companies are assigned a value of 0	The world’s 100 largest banks, 2020, S&P Global
	YEAR	Year	2021 is assigned a value of 1, and 2020 is assigned a value of 0	-

* The EPI data for this study were obtained from the Yale Center for Environmental Law and Policy’s EPI 2022 dataset. The EPI index is published every two years based on the most recent data available. ** Osiris is a global corporate database provided by Bureau van Dijk (BvD), offering comprehensive financial information on both listed and unlisted companies worldwide.

. To mitigate errors caused by outliers, all variables except dummy variables were Winsorized by setting values exceeding the 1st and 99th percentiles to the corresponding 1st and 99th percentile values, respectively.

4.2.1. Dependent Variable

The dependent variable in this paper is the number of TCFD disclosures (TCFD). Following the TCFD guidelines published in 2017, the disclosure items were directly measured by disaggregating the recommended disclosure categories into 11 items across four major categories. The guidelines provide specific information and requirements that companies should disclose. In this paper, these disclosure requirements were further disaggregated into a total of 53 items. Therefore, the TCFD score that banks can obtain ranges from a minimum of 0 to a maximum of 53. The TCFD disclosure items we segmented are listed in Appendix A. A dichotomous approach was adopted, where each item was assigned a value of 1 if the sample banks provided the corresponding information, and a value of 0 was assigned if otherwise. This unweighted approach has been commonly used in prior research [85]. Thus, the TCFD disclosure score of a bank is calculated as follows:

$${TCFD}_{ij}=\sum _{k=1}{d}_k$$

d_k = 1 if item k is disclosed by bank i in year j;

     = 0 if item k is not disclosed by bank i in year j.

The TCFD disclosures were verified by examining the TCFD reports, sustainability reports, climate reports, ESG reports, and annual reports available on each bank’s website.

4.2.2. Explanatory Variables

To test Hypothesis 1, the legal origin of each country (LEGAL) was assigned based on Porta et al. [60] and Porta et al. [86], where common law countries were assigned a value of 1 and civil law countries were assigned a value of 0. For testing Hypothesis 2, the Environmental Performance Index (EPI) of each country was used. The EPI data for this study were obtained from the Yale Center for Environmental Law and Policy’s EPI 2022 dataset. The EPI index is published every two years based on the most recent data available. Therefore, EPI 2022 can be considered as the measure that best reflects the environmental performance of countries during the study period of 2020–2021.

For Hypothesis 3, board size (BSIZE), the number of directors on the board was used after taking the logarithm of the count. For Hypothesis 4, board independence (INDEPENDENT), the proportion of non-executive directors on the board was calculated. For Hypothesis 5, board diversity (DIVERSITY), the proportion of female directors on the board was considered. For Hypothesis 6, CEO power, a dummy variable was created, where 1 was assigned if the CEO also served as the board chairperson, and a value of 0 was assigned if otherwise. Variables from Hypothesis 3 to Hypothesis 6 are related to corporate governance. The information used for these variables was obtained from the annual reports, proxy statements, and non-financial reports disclosed by each bank on their websites.

To test Hypothesis 7, the variable measuring the ease of shareholder litigation (SUIT) was used, which is provided by the World Bank Group annually. The Shareholder Litigation Index (SUIT) quantifies the likelihood of recovering legal costs by assessing the access and ease of shareholders in accessing internal evidence within a country, evidentiary standards, and other related factors. It is provided on a scale from 0 to 10.

4.2.3. Control Variables

According to previous studies, such as those of Kilic et al. [11] and Caby et al. [51], banks tend to disclose more climate-related information when they have larger sizes, higher profitability, lower risk, and when they are listed in the public market. Therefore, to observe the influence of institutional and governance factors on TCFD disclosure in banks, the following factors were controlled for.

To control for bank size (SIZE), the logarithm of the bank’s asset size was used. Bank profitability was measured using return on assets (ROA), which is calculated by dividing net income by total assets. Bank risk (LEV) was captured by the debt-to-asset ratio, which is calculated as a proxy for risk by dividing total liabilities by total assets. Additionally, listing status was included as a dummy variable, where banks listed on the stock exchange were assigned a value of 1, and non-listed banks were assigned a value of 0.

Furthermore, to control for the effect of time, the year 2021 was assigned a value of 1, and the year 2020 was assigned a value of 0.

4.3. Empirical Model

This study utilized panel data to perform regression analysis. Firstly, the Hausman test was conducted to test for the presence of fixed effects or random effects. The test results indicated that the data are better suited to a fixed effects model. Therefore, ordinary least squares (OLS) regression with year dummies was applied. The following model was used to test the hypotheses:

TCFD = α + β₁LEGAL + β₂EPI + β₃SUIT + β₄BSIZE + β₅INDEPENDENT +
β₆DIVERSITY + β₇DUAL+ β₈SUIT*INDEPENDENT + β₉SIZE + β₁₀ROA +
β₁₁LEV + β₁₂LISTING + β₁₃YEAR + ε

where α represents the intercept, β₁ through β₁₃ represent the coefficient estimates, and ε denotes the error term.

TCFD refers to the TCFD disclosure amount, which ranges from 0 to 53. LEGAL is a dummy variable indicating the legal origin of a country, where common law countries are assigned a value of 1, and civil law countries are assigned 0. EPI represents the Environmental Performance Index of a country, ranging from 0 to 100, where higher values indicate better environmental performance. SUIT is an index measuring the ease of shareholder litigation, ranging from 0 to 10, where higher values indicate a greater likelihood of shareholders being able to recover legal costs through lawsuits. BSIZE represents the logarithm of the number of directors on the board. INDEPENDENT is the ratio of non-executive directors to total directors on the board. DIVERSITY is the ratio of female directors to total directors on the board. DUAL is a dummy variable indicating the authority of the CEO, where 1 indicates that the CEO also serves as the chairman of the board, and 0 indicates otherwise. SIZE represents the logarithm of the asset value (in million USD) of the firm in the corresponding year. ROA is the ratio of net income to total assets in a given year. LEV is the ratio of debt to equity in a given year. LISTING is a dummy variable indicating the listing status, where 1 represents listed and 0 represents unlisted. YEAR is a dummy variable, with 1 assigned to the year 2021 and 0 assigned to the year 2020.

5. Empirical Results

5.1. Descriptive Statistics and Correlation Analysis

Table 2. Descriptive statistics.

Variables	N	Mean	Median	Min	Max	SD
TCFD	198	15.35	16.00	0	37.02	10.66
LEGAL	198	0.32	0.00	0	1	0.47
EPI	198	52.14	51.10	28.3	77.7	14.7
SUIT	198	6.9	7.00	3.98	9.00	1.64
BSIZE	198	2.62	2.64	1.94	3.33	0.29
INDEPENDENT	198	0.84	0.87	0.48	1	0.12
DIVERSITY	198	0.27	0.29	0	0.54	0.14
DUAL	198	0.14	0.00	0	1	0.35
SIZE	198	13.61	13.47	12.59	15.37	0.75
ROA	198	0.01	0.01	0.00	0.02	0
LEV	198	0.93	0.93	0.86	0.97	0.02
LISTING	198	0.87	1.00	0	1	0.34
YEAR	198	0.49	0	0	1	0.5

provides a summary of the descriptive statistics, including the mean and standard deviation, for the variables. Regarding the dependent variable, the TCFD disclosure items, out of the 53 recommended items in 2017, the sampled banks disclosed an average of 15 items, with the highest number of disclosures being 37.

In terms of legal origin (LEGAL), 32% of the sampled countries are classified as common law countries, while the remaining countries follow civil law systems. The average Environmental Performance Index (EPI) score for the countries is 52.14, with a maximum score of 77.7 and a minimum score of 28.3. The average shareholder litigation ease index (SUIT) for the countries is 6.9, with a maximum value of 9 and a minimum value of 3.98.

For governance variables related to banks, the average logarithm of board size (BSIZE) is 0.84, which translates to approximately 14 directors in terms of the number of individuals. The average proportion of non-executive directors (INDEPENDENT) and female directors (DIVERSITY) is 84% and 27%, respectively. Among the entire sample, the proportion of CEOs also serving as board chairs (DUAL) is 14%.

Table 3. Correlations.

	TCFD	LEGAL	EPI	SUIT	BSIZE	INDEPENDENT	DIVERSITY	DUAL	SIZE	ROA	LEV	LISTING	YEAR
TCFD	1
LEGAL	0.35 (***)	1
EPI	0.63 (***)	0.2 (***)	1
SUIT	0.43 (***)	0.73 (***)	0.38 (***)	1
BSIZE	−0.11	−0.2 (***)	0.05	−0.22 (***)	1
INDEPEN DENT	0.24 (***)	0.3 (***)	0.1	0.18 (***)	−0.33 (***)	1
DIVERSITY	0.54 (***)	0.35 (***)	0.62 (***)	0.37 (***)	−0.01	0.23 (***)	1
DUAL	−0.03	0.22 (***)	−0.03	0.38 (***)	−0.18 (***)	0.07	0.05	1
SIZE	0.18 (***)	0.02	−0.08	−0.03	0.15 (**)	−0.17 (**)	0.08	−0.02	1
ROA	−0.14 (**)	0.26 (***)	−0.46 (***)	0.1	−0.21 (***)	0.27 (***)	−0.08	0.24 (***)	−0.08	1
LEV	0.23 (***)	−0.31 (***)	0.47 (***)	−0.12 (*)	0.08	−0.24 (***)	0.18 (***)	−0.24 (***)	0.13 (*)	−0.71 (***)	1
LISTING	0.24 (***)	0.2 (***)	−0.14 (**)	0.18 (**)	−0.4 (***)	0.25 (***)	0.08	−0.01	0.11	0.28 (***)	−0.26 (***)	1
YEAR	0.26 (***)	0.01	0.01	0.01	0.01	0.02	0.05	−0.02	0.01	0.23 (***)	0.01	0	1

(***) Significance level of 1% or less, (**) 5% or less, (*) 10% or less.

presents the correlation matrix among the variables. The correlation coefficients among most of the explanatory variables were below 0.5, suggesting that the condition of independence among independent variables for conducting OLS regression analysis appeared to be met. However, the correlation coefficient between a country’s legal origin (LEGAL) and the ease of shareholder lawsuits index (SUIT) was 0.73, and that between profitability (ROA) and the debt ratio (LEV) was −0.71, indicating relatively high levels. Nonetheless, the country’s legal origin (LEGAL) and the ease of shareholder lawsuits index (SUIT) are key explanatory variables that this paper aims to analyze, and according to prior research, profitability (ROA) and debt ratio (LEV) need to be controlled as factors influencing banks’ voluntary disclosures; therefore, all were included in the analysis model. A check for potential multicollinearity was conducted, and the results showed that the VIF values were below 3, indicating no concerns regarding multicollinearity.

5.2. Regression Results

Table 4. Results of OLS regression analysis.

Variable Name	β	t-Value	p-Value
LEGAL	3.0	1.86	0.06 *
EPI	0.32	5.67	0.00 ***
SUIT	11.87	4.02	0.00 ***
BSIZE	1.38	0.72	0.47
INDEPENDENT	93.13	4.19	0.00 ***
DIVERSITY	12.79	2.5	0.01 **
DUAL	−1.79	−1.19	0.23
SIZE	2.73	4.12	0.00 ***
ROA	−177	0.88	0.38
LEV	4.74	0.13	0.90
LISTING	7.06	4.39	0.00 ***
YEAR	5.48	5.66	0.00 ***
SUIT * INDEPENDENT	−12.88	−3.8	0.00 ***
Adj-R2	0.65
F	29.09 ***

(***) Significance level of 1% or less, (**) 5% or less, (*) 10% or less.

displays the results of the regression analysis. Hypothesis 1, which suggests that banks located in common law countries (LEGAL) engage in more TCFD disclosures, is supported, as the p-value is 0.06, rejecting the null hypothesis at a significance level of 10% and accepting the research hypothesis. This implies that the strong investor protection culture in common law countries has positively influenced TCFD disclosure. This finding contradicts previous studies that found CSR disclosure to be more prevalent in stakeholder-oriented countries [47,48], indicating that the stakeholders promoting TCFD disclosure may not be the same as those promoting CSR disclosure.

Stakeholders who advocate for TCFD disclosure, such as shareholders and investors, are likely to prioritize financial considerations, indicating that TCFD is perceived more as an initiative for financial risk management rather than solely a social responsibility endeavor. Additionally, this finding aligns with previous research by Luo et al. [8] and Grauel et al. [22], indicating that carbon disclosure is more active in common law countries. This suggests that companies perceive climate change issues such as greenhouse gas emissions as having a more direct impact on financial performance than CSR disclosure does.

Hypothesis 2, which posits that banks in countries with better environmental performance actively respond to climate-related financial disclosure, is supported at a 1% significance level, rejecting the null hypothesis and accepting the research hypothesis. This finding aligns with prior studies grounded in institutional theory, which suggest that institutional differences at the national level, such as political, financial, or legal systems, influence the level of carbon disclosure by firms [6,8,22,51]. This study confirms that the environmental commitment of the host country has an impact on TCFD disclosure by banks.

Hypothesis 3, which states that board size (BSIZE) influences voluntary TCFD disclosure, was not found to be statistically significant, leading to the failure to reject the null hypothesis. Therefore, the size of the bank’s board of directors does not appear to be a significant factor affecting TCFD disclosure. Prior empirical analyses on the relationship between board size and voluntary climate disclosure have yielded mixed results, and the findings of this study align with studies such as those by Amran et al. [50], Kilic et al. [56], and Kilic et al. [11], which also found no significant impact of board size on climate disclosure.

Hypothesis 4, which proposes that a higher proportion of independent directors on the board (INDEPENDENT) would lead to increased voluntary TCFD disclosure, is supported at a 1% significance level, rejecting the null hypothesis and accepting the research hypothesis. This finding supports the agency theory, which suggests that independent directors, by monitoring and controlling executives, mitigate information asymmetry through disclosure promotion. Independent directors, being relatively free from management influence compared to executive directors, can be considered as playing a role in promoting TCFD disclosure. Moreover, according to the resource dependence theory, independent directors expand the organizational boundaries and contribute to transferring new insights and perspectives on climate change to the firm [87]. This finding is consistent with previous empirical studies such as those of Liao et al. [36], Jizi et al. [52], and Prado-Lorenzo et al. [6], which also found that higher board independence leads to more proactive climate disclosure. This supports the argument that board independence serves as a facilitator of disclosure promotion and resource expansion.

Hypothesis 5 states that as the proportion of female directors on the board increases, there will be a higher amount of voluntary disclosure of TCFD (Task Force on Climate-related Financial Disclosures) information. This hypothesis was supported as the variable representing the proportion of female directors (DIVERSITY) was statistically significant at a 5% significance level, and the null hypothesis was rejected in favor of the research hypothesis (p-value 0.012). The proportion of female directors on the board serves as a proxy for board diversity, and this result suggests that higher board diversity leads to a greater amount of TCFD disclosure. This aligns with prior studies that argue that diverse boards, that is, boards consisting of individual members of diverse backgrounds and expertise, are more likely to consider a variety of knowledge, perspectives, and ideas in the decision-making process and are better positioned to mediate the demands of various stakeholders [36,37]. Furthermore, this finding is consistent with the results of previous studies by Liao et al. [36], Ben-Amar et al. [33], and Cosma et al. [58], which also found that a higher proportion of female directors on the board is associated with increased climate-related disclosures. Therefore, it can be concluded that boards with higher diversity are more likely to reflect the demands of stakeholders regarding climate change and engage in a higher level of TCFD disclosure.

Hypothesis 6 suggested that when the CEO also holds the position of board chairman, there is a lower level of TCFD disclosure. The variable representing CEO power (DUAL) showed a negative correlation coefficient, as expected, but the influence was not statistically significant (t = −1.19, p-value = 0.23). Similar non-significant findings have been reported in several prior studies [9,36,88]. However, it is worth noting that only 14% of the sample in this study had CEOs who also served as board chairmen, which raises the possibility that the lack of significant results could be due to the bias introduced by this unbalanced sample composition.

Hypothesis 7 posits that in countries with easier access to shareholder litigation, there is a lower level of TCFD information disclosure as the proportion of non-executive directors increases. The interaction term SUIT*INDEPENDENT was found to be statistically significant at a 1% significance level, leading to the rejection of the null hypothesis and the acceptance of the research hypothesis. This finding indicates a shift in the tendency of non-executive directors from promoting TCFD disclosure, as observed in Hypothesis 4, to inhibiting it in countries with active shareholder litigation. This can be interpreted based on the rationale that in countries where shareholder litigation is easily pursued [83], non-executive directors may seek to avoid the risk of facing shareholder lawsuits due to breaches of their fiduciary duties of care. They may also be concerned about the potential negative impact on their personal reputation and the financial well-being of the companies they serve as directors [84]. Consequently, they may be less inclined to voluntarily disclose information on issues such as climate change if it will not provide immediate and direct benefits to shareholders. Therefore, these results demonstrate that the ease of shareholder litigation regulates the role of non-executive directors in promoting TCFD disclosure.

Furthermore, the ease of shareholder litigation (SUIT) was also found to have a significant positive effect on TCFD disclosure when considered as a standalone variable (p-value 0.00). In other words, countries with easier access to shareholder litigation exhibit a tendency for higher levels of TCFD disclosure. This aligns with the arguments made by Field et al. [89] and Skinner [90], who suggested that voluntary disclosure has a preemptive effect in deterring litigation and reducing the potential damages to the company. Managers have two conflicting incentives to voluntarily disclose financial information. When the company’s performance is good, managers are motivated to disclose favorable information to distinguish their company from underperforming ones. On the other hand, when the company’s performance is poor, managers seek to proactively prevent litigation or minimize losses resulting from litigation by disclosing unfavorable information [89]. Therefore, in countries where shareholder litigation is less prevalent, there is a tendency to disclose more favorable information, even if it is uncertain, in order to attract investments or support the company’s stock price. Conversely, in countries with easier access to litigation, the disclosure of favorable information may decrease, while the voluntary disclosure of negative news may increase.

TCFD disclosure serves to inform investors about the potential losses associated with climate change, allowing them to make investment decisions while being aware of these risks. Therefore, investors can make informed decisions regarding whether they are willing to bear the risks expected to emerge from climate change after conducting sufficient evaluations. As a result, TCFD disclosure can be expected to have a preventive effect on litigation by providing investors with prior notice. Hence, in countries with easier access to shareholder litigation, it appears that there is a higher level of TCFD disclosure as a means of preventing lawsuits related to climate change.

Our empirical analysis with global banks has confirmed that the institutional factors of the country to which the bank belongs and the internal governance of the bank influence the bank’s voluntary climate financial disclosures. The active climate disclosure in investor-centric common law jurisdictions aligns with the findings of Healy et al. (2001) and Beekes et al. (2016) that voluntary disclosures are more prevalent in common law countries [14,62]. The fact that banks in countries with high environmental performance disclose more climate-related information is consistent with the research presented by Luo et al. (2012), Grauel et al. (2016), and Caby et al. (2020) [8,22,51].

From the perspective of internal bank governance factors, the research findings that higher board independence and diversity lead to more climate disclosures extend the influence of board composition on voluntary disclosures to the area of climate financial disclosures, as indicated in the literature by Ben-Amar et al. (2017), Liao et al. (2015), and Jizi et al. (2014) [33,36,52]. However, the size of the board was not found to have a meaningful impact on climate financial disclosures, thereby contributing further evidence to the similar conclusions regarding CSR and carbon emissions disclosures found by Kilic et al. in 2015 and 2019 [11,56]. In contrast to one of our hypothesis, the CEO’s authority did not significantly affect climate financial disclosures, indicating mixed results in the existing research and pointing to an area that requires additional analysis. Finally, the finding that the ease of shareholder lawsuits negatively moderates the positive correlation between non-executive directors and climate financial disclosures is in line with a study by Prado-Lorenzo et al. (2010) which demonstrated that independent directors tend to oppose climate disclosures in industries characterized by high levels of litigation [7].

6. Conclusions

As the transition to a low-carbon economy takes place, the role of banks as financial intermediaries is being emphasized, making banks increasingly relevant in addressing climate change. Historically, banks have been less focused on climate change because their direct greenhouse gas emissions were relatively low compared to other industries. However, as the awareness of the significant indirect greenhouse gas emissions resulting from the funds provided by banks has grown, there has been an increasing demand from stakeholders for proactive climate policies from banks. Furthermore, the need for a proactive climate change response has also emerged from a financial risk management perspective for banks. Banks are now recognizing the importance of integrating climate change considerations into their financial risk management practices.

This paper explored the impact of institutional factors and internal governance on voluntary TCFD climate financial disclosures in banks. Regarding institutional factors, it was found that banks in common law countries with strong investor protection and countries with good environmental performance exhibited more active voluntary climate financial disclosures by banks. Through this finding, the explanatory power of institutional theory in explaining the influence of institutional factors surrounding banks on climate financial disclosures was reaffirmed.

Furthermore, it was found that both internal factors and higher levels of board independence and diversity promote voluntary TCFD disclosures. Additionally, a moderating effect was observed in countries with easier access to shareholder litigation, where non-executive directors were found to oppose TCFD disclosures instead. However, contrary to expectations, board size and CEO authority were not found to have a significant impact on TCFD disclosures.

In summary, Hypotheses 1 and 2, stating that a common law system and national environmental performance are institutional factors that positively influence climate financial disclosure; Hypotheses 4 and 5, stating that board independence and diversity are governance factors that positively influence climate financial disclosure; and Hypothesis 7, positing that the ease of shareholder litigation moderates the positive relationship between board independence and climate financial disclosure, were finally accepted at the 1% or 5% significance level. However, Hypothesis 3, positing that board size will have a significant impact on climate financial disclosure, and Hypothesis 6, which stated that CEO power will discourage climate financial disclosure, were not supported, as there was no significant impact.

This study holds a high level of significance. Firstly, it is the first study to explore the determinants of climate disclosures specifically in the context of global banks, thereby filling a gap in the existing literature regarding the voluntary disclosures of banks. Achieving the goal of limiting the increase in global temperature to 1.5 degrees Celsius above pre-industrial levels, which is a key objective for humanity, requires an urgent transition to a low-carbon society. In this regard, the climate financial disclosures of banks can serve as a driving force for banks, as influential financial intermediaries, to actively engage in climate action. Therefore, this paper provides valuable insights that can aid in designing effective policies to promote climate financial disclosures in banks.

Secondly, the finding of this paper that climate disclosures are more active in common law countries with strong investor protection contrasts with the findings of prior studies [47,48] which found that civil law countries, where stakeholders are more emphasized, engage in more active CSR disclosures. This indicates that different stakeholders may drive the pursuit of these two types of disclosures. In other words, this paper provides indirect evidence that climate disclosures are driven by shareholders and investors who are more sensitive to financial performance rather than solely driven by social responsibility.

Thirdly, this paper expands the scope of climate disclosure research by analyzing TCFD climate financial disclosures. Previous studies on climate disclosures have mainly relied on binary variables such as the presence or absence of GHG emission disclosures or participation in the Carbon Disclosure Project (CDP), which made it challenging to differentiate companies’ levels of climate disclosure effectively. In this study, by measuring climate disclosures using TCFD disclosure quantity, the content of climate disclosures was extended to the realm of financial risks. Furthermore, by disaggregating the TCFD recommendations into 53 items, it was possible to observe the specific impacts of institutional and governance factors on climate disclosures in greater detail.

Fourthly, the observed relationship between shareholder litigation and voluntary disclosures in this paper makes a significant contribution to the literature in this field. This is because prior studies have shown conflicting results regarding the relationship between shareholder litigation and disclosures. Some studies have found a positive relationship between litigation and disclosures [89,90], while others have found the opposite [63,91]. Previous research has mainly focused on voluntary disclosures related to earnings, and empirical observations on the relationship between climate disclosures and shareholder litigation were made for the first time in this paper. Additionally, the exploration of the moderating effect of shareholder litigation on the governance mechanisms that encourage disclosure is also a pioneering aspect of this study.

The most significant contribution of this paper lies in the fact that it extends the field of research on voluntary disclosures and climate disclosures to climate financial disclosures, adding empirical evidence to the banking sector, where research has been extremely scarce. Furthermore, this study is the first to reveal that climate financial disclosures are more frequent in countries under common law jurisdiction with strong investor protection, considering the nature of TCFD climate financial disclosures as a fusion of financial and CSR disclosures, which is an important contribution at a time when TCFD disclosures are becoming increasingly significant. Additionally, the finding that the power of non-executive directors, as a driving force for climate financial disclosures, is weakened when faced with external factors such as shareholder lawsuits has significant implications for governance policies aimed at promoting climate financial disclosures.

This study selected the top 100 global banks based on asset size as the sample, which may limit the generalizability of the research findings. Therefore, further research involving examinations of smaller banks is needed to complement the results of this study. Additionally, by further disaggregating the composition of board members—such as their level of independence from management, institutional affiliation, shareholding, gender, race, etc.—additional analysis could shed light on the varying strengths of each director in promoting climate disclosures. This could generate valuable insights into the composition of boards to enhance climate disclosures.