ESG performance and banks’ funding costs

In this study, we explore whether and to what extent Environmental, Social, and Governance (ESG) factors impact banks’ funding costs. Using a sample composed of 493 banks located in 39 advanced and emerging economies over the 2003–2020 period, we find that banks benefit from incorporating ESG practices into financial decisions, enjoying lower costs of raising interest-bearing liabilities (total cost of funds), as well as reduced costs of attracting deposits. All ESG dimensions are responsible for this outcome in the case of total cost of funds, whereas for the cost of deposits the Environmental pillar appears to have an insignificant impact, suggesting that depositors do not value banks' environmental commitments, but rather their social performance and corporate governance quality. Furthermore, the empirical evidence indicates that only large banks and those located in developed countries reap the benefits of increased ESG performance in terms of reduced financing costs.