ESG activity and bank lending during financial crises

This paper explores how banks' environmental, social, and governance (ESG) activities affect their lending during financial crises. We use a sample of 83 listed banks from 20 European countries for the 2002-2020 period and consider the global financial crisis of 2007-2009 and the European sovereign debt crisis of 2010-2012. We implement two-step system GMM dynamic panel data estimation techniques. We also address potential endogeneity issues using instrumental variables (IV) and two-stage least squares (2SLS) estimations by instrumenting ESG activity with board gender diversity. We find that lending falls to a lesser extent for banks with higher ESG scores during crisis times. Looking at the different potential channels shows that, during crises, banks more engaged in ESG activities are less affected in terms of credit and asset risk, and profitability. They also face a lower reduction in market funding, allowing them to downsize to a lesser extent during crises, and their deposit rates do not increase as much as in less ESG-engaged banks. Going deeper reveals that our findings are mainly driven by the environmental pillar component of ESG scores.