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Do ESG strategies enhance bank stability during financial turmoil? Evidence from Europe

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  • Laura Chiaramonte
  • Alberto Dreassi
  • Claudia Girardone
  • Stefano Piserà

Abstract

This paper investigates the joint and separate effects of Environmental (E), Social (S), and Governance (G) scores on bank stability. Using a sample of European banks operating in 21 countries over 2005–2017, we find that the total ESG score, as well as its sub-pillars, reduces bank fragility during periods of financial distress. This stabilizing effect holds strongly for banks with higher ESG ratings. These results are confirmed by a differences-in-differences (DID) analysis built around the introduction of the EU 2014 Non-Financial Reporting Directive (NFRD). Our evidence also reveals that, in times of financial turmoil, the longer the duration of ESG disclosures, the greater the benefits on stability. Finally, we show that the ESG–bank stability linkages vary significantly across banks’ characteristics and operating environments. Our findings are robust to selection bias and endogeneity concerns. Overall, they support the regulatory effort in requiring an enhanced disclosure of non–financial information.

Suggested Citation

  • Laura Chiaramonte & Alberto Dreassi & Claudia Girardone & Stefano Piserà, 2022. "Do ESG strategies enhance bank stability during financial turmoil? Evidence from Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 28(12), pages 1173-1211, August.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:12:p:1173-1211
    DOI: 10.1080/1351847X.2021.1964556
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    Cited by:

    1. Liu, Suyi & Jin, Justin & Nainar, Khalid, 2023. "Does ESG performance reduce banks’ nonperforming loans?," Finance Research Letters, Elsevier, vol. 55(PA).
    2. Piotr M. Bolibok, 2024. "Does Firm Size Matter for ESG Risk? Cross-Sectional Evidence from the Banking Industry," Sustainability, MDPI, vol. 16(2), pages 1-26, January.
    3. Zou, Fei & Huang, Lingyu & Ghaemi Asl, Mahdi & Delnavaz, Mohammad & Tiwari, Sunil, 2023. "Natural resources and green economic recovery in responsible investments: Role of ESG in context of Islamic sustainable investments," Resources Policy, Elsevier, vol. 86(PA).
    4. Volker Brühl, 2023. "The Green Asset Ratio (GAR): a new key performance indicator for credit institutions," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(1), pages 57-83, March.
    5. Jasman Tuyon & Okey Peter Onyia & Aidi Ahmi & Chia-Hsing Huang, 2023. "Sustainable financial services: reflection and future perspectives," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 28(4), pages 664-690, December.
    6. Quang Trinh, Vu & Duong Cao, Ngan & Li, Teng & Elnahass, Marwa, 2023. "Social capital, trust, and bank tail risk: The value of ESG rating and the effects of crisis shocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).

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