Sustainability disclosure and bank liquidity risk: evidence from global banking sector

We examine whether sustainability disclosure mitigates banks’ liquidity risk using an international panel of 640 listed banks from 52 countries over 2008–2023. Liquidity risk is a core yet understudied stability dimension in the ESG–banking literature, despite its critical role in financial resilience. Employing a dynamic difference GMM estimator, propensity score matching, and a multi-period difference-in-differences design exploiting staggered ESG disclosure regulations, we find that higher sustainability disclosure significantly reduces banks’ liquidity risk. This effect is economically meaningful and robust across alternative liquidity measures and extensive sensitivity tests. Decomposing ESG into its components, we show that environmental and social disclosures drive the reduction in liquidity risk, whereas governance disclosure has no discernible effect. The impact is stronger for larger banks and in jurisdictions with voluntary rather than mandatory disclosure regimes, consistent with signaling and credibility theories of voluntary reporting. Our results highlight a novel risk channel through which ESG disclosure influences bank stability, offering actionable insights for bank managers and regulators seeking to enhance liquidity resilience through disclosure policy.