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ESG uncertainties and valuation implications: Evidence from the EU banking sector

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  • Dou, Jie
  • Mirza, Nawazish
  • Umar, Muhammad
  • Horobet, Alexandra

Abstract

This study investigates the impact of financed emissions and ESG controversies on the valuation of banking firms within the European Union. As climate-related risks become increasingly critical to financial markets, banks face pressures to manage their contributions to climate change and adhere to evolving Environmental, Social, and Governance (ESG) standards. Using panel data between 2018 and 2021 of banks across twenty-seven countries, we assess the influence of financed emissions and ESG controversy scores on two key valuation metrics of residual income and price-to-book ratios. Our findings reveal that banks with lower ESG controversies tend to achieve higher market valuations. Regarding climate change, the banks with higher financed emissions face declining valuations. Our results highlight banks' strategic importance in minimizing their carbon footprint and mitigating ESG-related risks to safeguard long-term value. The research has significant actionable implications. We contribute to the ongoing dialogue on sustainable finance, offering insights for banks, regulators, and investors seeking to navigate the challenges of a transitioning financial sector.

Suggested Citation

  • Dou, Jie & Mirza, Nawazish & Umar, Muhammad & Horobet, Alexandra, 2025. "ESG uncertainties and valuation implications: Evidence from the EU banking sector," Research in International Business and Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:riibaf:v:76:y:2025:i:c:s027553192500128x
    DOI: 10.1016/j.ribaf.2025.102872
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    More about this item

    Keywords

    Financed emissions; ESG controversies; Bank valuation; Climate risks; Sustainable finance; Carbon footprint;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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