Analyzing the role of sustainable investor in global systemically important banks and less significant institutions

The purpose of our paper is to analyze the market reaction to banks’ sustainable activities, by focusing on the impact of Environmental, Social and Governance (ESG) practices on banks’ profitability and risk-taking. Specifically, we investigate if and to what extent banks with lower ESG scores are considered less profitable and riskier than those characterized by higher ones, and by taking into consideration both the joint and the separate effects of ESG dimensions. Using panel estimation methods on listed global systemically important bank and less significant European banks, over the period 2014–2020, we find that banks with higher ESG scores are perceived as more profitable and less risky by the market, thus supporting the risk mitigation view. Interestingly, our findings reveal that investors behave in the same way, regardless of the size of the bank, when assessing the impact of ESG scores on the bank's return and risk. Our evidence is robust to selection bias and endogeneity concerns. Overall, the results support the ESG regulatory policy on mandatory disclosures of non-financial reporting for larger entities and emphasize the need to enhance its benefits and extend it also to smaller banks.