Are ESG scores driven by financial information? Evidence from European banks

Luana Serino, Alessia Spignese and Francesco Campanella
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Luana Serino: Assistant Professor of Finance, Department of Management and Economics, Università Telematica Pegaso, Italy
Alessia Spignese: PhD student, University of Campania L. Vanvitelli, Italy
Francesco Campanella: Full Professor in Corporate Finance, University of Campania L. Vanvitelli, Italy

Journal of Risk Management in Financial Institutions, 2024, vol. 17, issue 4, 409-425

Abstract: In recent years, investors' increasing focus on sustainable investments and the sustainability orientation of companies has led to parallel growth in the market for environmental, social and governance (ESG) performance and ESG rating agencies. However, even though ESG rating agencies have become very influential institutions, the literature has found that ESG performance ratings provided by different agencies often differ from each other. This causes consequences that should be considered, such as complex evaluation of companies' ESG performance and uncertainty in ESG investment decisions. Therefore, it is necessary to identify which determinants influence ESG performance. This study aims to identify the internal determinants of an ESG score using bank-specific balance sheet indicators such as capital and risk ratios. The analysis focuses on the European banking sector from 2018 to 2022. Banks mainly foster the transition to a more inclusive and sustainable economy. Moreover, after the recent financial crises, banks have increased their social responsibility practices, strengthening their credibility, trust and reputation. Generalised estimating equations with standard error robust to heteroscedasticity were used. The results reveal that the factors that most influence the ESG score provided by ESG rating agencies are bank size and liquidity risk exposure. The larger the size of the bank and the lower the exposure to liquidity risk, the higher the ESG score assigned.

Keywords: banking system; credit risk; liquidity risk; ESG rating; financial risk; GEE model (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2024
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