IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v16y2024i2p679-d1317903.html
   My bibliography  Save this article

Does Firm Size Matter for ESG Risk? Cross-Sectional Evidence from the Banking Industry

Author

Listed:
  • Piotr M. Bolibok

    (Department of Economic Policy and Banking, The John Paul II Catholic University of Lublin, Al. Racławickie 14, 20-950 Lublin, Poland)

Abstract

The ambiguous evidence regarding the linkages between firm size and ESG risk in the relevant literature justifies the need for their further scientific investigation. A particularly interesting context for this task is offered by the banking industry, where financial institutions face both strong incentives to expand the scale of their activities and high reputational risk sensitivity. Given the above, this paper aims to systematize and enhance the theoretical underpinnings of the relationship between firm size and ESG risk in banks, highlighting its likely non-linear character, and to investigate it empirically in the cross-section of the international banking industry. This research employs uni- and multivariate, and linear and non-linear regression analyses applied to a sample of 668 banks that were assigned the Morningstar Sustainalytics ESG Risk Rating for the year 2021. The results demonstrate that, although, on average, size seems to be associated negatively with ESG risk in the cross-section, the relationship is in fact non-linear and follows a U-shaped pattern. The findings are robust regarding the impact of both country-specific contextual factors and outliers. This study emphasizes the importance of diseconomies of scale in ESG risk management, thus offering some important lessons and recommendations for bank executives and equity investors.

Suggested Citation

  • 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.
  • Handle: RePEc:gam:jsusta:v:16:y:2024:i:2:p:679-:d:1317903
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/16/2/679/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2071-1050/16/2/679/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. R. Edward Freeman & Andrew C. Wicks & Bidhan Parmar, 2011. "Stakeholder Theory as a Basis for Capitalism," International Economic Association Series, in: Lorenzo Sacconi & Margaret Blair & R. Edward Freeman & Alessandro Vercelli (ed.), Corporate Social Responsibility and Corporate Governance, chapter 3, pages 52-72, Palgrave Macmillan.
    2. Hsiang-Lin Chih & Hsiang-Hsuan Chih & Tzu-Yin Chen, 2010. "On the Determinants of Corporate Social Responsibility: International Evidence on the Financial Industry," Journal of Business Ethics, Springer, vol. 93(1), pages 115-135, April.
    3. Hughes, Joseph P. & Mester, Loretta J., 2013. "Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 559-585.
    4. Wu, Meng-Wen & Shen, Chung-Hua, 2013. "Corporate social responsibility in the banking industry: Motives and financial performance," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3529-3547.
    5. Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, vol. 74(1), pages 149-179, October.
    6. Athanasoglou, Panayiotis P. & Brissimis, Sophocles N. & Delis, Matthaios D., 2008. "Bank-specific, industry-specific and macroeconomic determinants of bank profitability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(2), pages 121-136, April.
    7. Florian Neitzert & Matthias Petras, 2022. "Corporate social responsibility and bank risk," Journal of Business Economics, Springer, vol. 92(3), pages 397-428, April.
    8. Avramidis, Panagiotis & Cabolis, Christos & Serfes, Konstantinos, 2018. "Bank size and market value: The role of direct monitoring and delegation costs," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 127-138.
    9. Béatrice Parguel & Florence Benoît-Moreau & Fabrice Larceneux, 2011. "How Sustainability Ratings Might Deter "Greenwashing": A Closer Look at Ethical Corporate Communication," Post-Print halshs-00561187, HAL.
    10. He, Guosheng & Liu, Yiting & Chen, Fu, 2023. "Research on the impact of environment, society, and governance (ESG) on firm risk: An explanation from a financing constraints perspective," Finance Research Letters, Elsevier, vol. 58(PA).
    11. Elena Platonova & Mehmet Asutay & Rob Dixon & Sabri Mohammad, 2018. "The Impact of Corporate Social Responsibility Disclosure on Financial Performance: Evidence from the GCC Islamic Banking Sector," Journal of Business Ethics, Springer, vol. 151(2), pages 451-471, August.
    12. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2018. "Banks, government Bonds, and Default: What do the data Say?," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 98-113.
    13. David C. Wheelock & Paul W. Wilson, 2012. "Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 171-199, February.
    14. Dang, Chongyu & (Frank) Li, Zhichuan & Yang, Chen, 2018. "Measuring firm size in empirical corporate finance," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 159-176.
    15. Irja Vormedal & Audun Ruud, 2009. "Sustainability reporting in Norway – an assessment of performance in the context of legal demands and socio‐political drivers," Business Strategy and the Environment, Wiley Blackwell, vol. 18(4), pages 207-222, May.
    16. Samuel Drempetic & Christian Klein & Bernhard Zwergel, 2020. "The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review," Journal of Business Ethics, Springer, vol. 167(2), pages 333-360, November.
    17. 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.
    18. Béatrice Parguel & Florence Benoît-Moreau & Fabrice Larceneux, 2011. "How Sustainability Ratings Might Deter ‘Greenwashing’: A Closer Look at Ethical Corporate Communication," Journal of Business Ethics, Springer, vol. 102(1), pages 15-28, August.
    19. Apergis, Nicholas & Poufinas, Thomas & Antonopoulos, Alexandros, 2022. "ESG scores and cost of debt," Energy Economics, Elsevier, vol. 112(C).
    20. Ina Freeman & Amir Hasnaoui, 2011. "The Meaning of Corporate Social Responsibility: The Vision of Four Nations," Journal of Business Ethics, Springer, vol. 100(3), pages 419-443, May.
    21. repec:dau:papers:123456789/4687 is not listed on IDEAS
    22. Acharya, Viral V. & Steffen, Sascha, 2015. "The “greatest” carry trade ever? Understanding eurozone bank risks," Journal of Financial Economics, Elsevier, vol. 115(2), pages 215-236.
    23. Calomiris, Charles W. & Nissim, Doron, 2014. "Crisis-related shifts in the market valuation of banking activities," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 400-435.
    24. Amal Aouadi & Sylvain Marsat, 2018. "Do ESG Controversies Matter for Firm Value? Evidence from International Data," Journal of Business Ethics, Springer, vol. 151(4), pages 1027-1047, September.
    25. Dorothée Baumann-Pauly & Christopher Wickert & Laura Spence & Andreas Scherer, 2013. "Organizing Corporate Social Responsibility in Small and Large Firms: Size Matters," Journal of Business Ethics, Springer, vol. 115(4), pages 693-705, July.
    26. Herenia Gutiérrez-Ponce & Sigit Arie Wibowo, 2023. "Do Sustainability Activities Affect the Financial Performance of Banks? The Case of Indonesian Banks," Sustainability, MDPI, vol. 15(8), pages 1-17, April.
    27. Michael Robinson & Anne Kleffner & Stephanie Bertels, 2011. "Signaling Sustainability Leadership: Empirical Evidence of the Value of DJSI Membership," Journal of Business Ethics, Springer, vol. 101(3), pages 493-505, July.
    28. Richard Paul Gregory, 2024. "The influence of firm size on ESG score controlling for ratings agency and industrial sector," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 14(1), pages 86-99, January.
    29. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
    30. Smirlock, Michael, 1985. "Evidence on the (Non) Relationship between Concentration and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 69-83, February.
    31. Lois Mahoney & Robin W. Roberts, 2007. "Corporate social performance, financial performance and institutional ownership in Canadian firms," Accounting Forum, Taylor & Francis Journals, vol. 31(3), pages 233-253, September.
    32. John Goddard & Phil Molyneux & John O. S. Wilson, 2004. "The profitability of european banks: a cross‐sectional and dynamic panel analysis," Manchester School, University of Manchester, vol. 72(3), pages 363-381, June.
    33. Graafland, J.J. & Ven van de, B. & Stoffele, N., 2003. "Strategies and instruments for organising CSR by small and large businesses in the Netherlands," MPRA Paper 20754, University Library of Munich, Germany.
    34. Hoang, Thi Hong Van & Pham, Linh & Nguyen, Thanh Thi Phuong, 2023. "Does country sustainability improve firm ESG reporting transparency? The moderating role of firm industry and CSR engagement," Economic Modelling, Elsevier, vol. 125(C).
    35. Riccardo Ferretti & Giovanni Gallo & Andrea Landi & Valeria Venturelli, 2018. "Market-Book Ratios of European Banks: What Does Explain the Structural Fall?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 18011, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    36. Scholtens, Bert & Dam, Lammertjan, 2007. "Banking on the Equator. Are Banks that Adopted the Equator Principles Different from Non-Adopters?," World Development, Elsevier, vol. 35(8), pages 1307-1328, August.
    37. Richard Davies & Belinda Tracey, 2014. "Too Big to Be Efficient? The Impact of Implicit Subsidies on Estimates of Scale Economies for Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 219-253, February.
    38. Finger, Maya & Gavious, Ilanit & Manos, Ronny, 2018. "Environmental risk management and financial performance in the banking industry: A cross-country comparison," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 240-261.
    39. Amir Barnea & Amir Rubin, 2010. "Corporate Social Responsibility as a Conflict Between Shareholders," Journal of Business Ethics, Springer, vol. 97(1), pages 71-86, November.
    40. Krishna Udayasankar, 2008. "Corporate Social Responsibility and Firm Size," Journal of Business Ethics, Springer, vol. 83(2), pages 167-175, December.
    41. Riccardo Ferretti & Giovanni Gallo & Andrea Landi & Valeria Venturelli, 2018. "Market-Book Ratios of European Banks: What Does Explain the Structural Fall?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0065, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    42. Luís Cabral, 2016. "Living Up to Expectations: Corporate Reputation and Persistence of Firm Performance," Strategy Science, INFORMS, vol. 1(1), pages 2-11, March.
    43. Alan Gregory & Rajesh Tharyan & Julie Whittaker, 2014. "Corporate Social Responsibility and Firm Value: Disaggregating the Effects on Cash Flow, Risk and Growth," Journal of Business Ethics, Springer, vol. 124(4), pages 633-657, November.
    44. Pratima Bansal, 2005. "Evolving sustainably: a longitudinal study of corporate sustainable development," Strategic Management Journal, Wiley Blackwell, vol. 26(3), pages 197-218, March.
    45. 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).
    46. Jacob Hörisch & Matthew P. Johnson & Stefan Schaltegger, 2015. "Implementation of Sustainability Management and Company Size: A Knowledge‐Based View," Business Strategy and the Environment, Wiley Blackwell, vol. 24(8), pages 765-779, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luning Tong & Maowei Chen, 2024. "The Impact of Female Director Background on the ESG Performance of Chinese Technology Firms: A Moderating Effect Based on Risk Appetite," Sustainability, MDPI, vol. 16(23), pages 1-20, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Samuel Drempetic & Christian Klein & Bernhard Zwergel, 2020. "The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review," Journal of Business Ethics, Springer, vol. 167(2), pages 333-360, November.
    2. Seyed Alireza Athari & Chafic Saliba & Elsa Abboud & Nourhan El-Bayaa, 2024. "Examining the Quadratic Impact of Sovereign Environmental, Social, and Governance Practices on Firms’ Profitability: New Insights from the Financial Industry in Gulf Cooperation Council Countries," Sustainability, MDPI, vol. 16(7), pages 1-26, March.
    3. Biktimirov, Ernest N. & Afego, Pyemo N., 2022. "Does investors’ valuation of corporate environmental activities vary between developed and emerging market firms?," Finance Research Letters, Elsevier, vol. 47(PA).
    4. Piotr Bolibok, 2021. "The Impact of Social Responsibility Performance on the Value Relevance of Financial Data in the Banking Sector: Evidence from Poland," Sustainability, MDPI, vol. 13(21), pages 1-19, October.
    5. Francesco Gangi & Antonio Meles & Eugenio D'Angelo & Lucia Michela Daniele, 2019. "Sustainable development and corporate governance in the financial system: Are environmentally friendly banks less risky?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 26(3), pages 529-547, May.
    6. Luis Otero-González & Pablo Durán-Santomil & Luis-Ignacio Rodríguez-Gil & Rubén Lado-Sestayo, 2021. "Does a Company’s Profitability Influence the Level of CSR Development?," Sustainability, MDPI, vol. 13(6), pages 1-15, March.
    7. Moutsianas, Konstantinos A. & Kosmidou, Kyriaki, 2016. "Bank earnings volatility in the UK: Does size matter? A comparison between commercial and investment banks," Research in International Business and Finance, Elsevier, vol. 38(C), pages 137-150.
    8. Mario La Torre & Sabrina Leo & Ida Claudia Panetta, 2021. "Banks and environmental, social and governance drivers: Follow the market or the authorities?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(6), pages 1620-1634, November.
    9. Nizam, Esma & Ng, Adam & Dewandaru, Ginanjar & Nagayev, Ruslan & Nkoba, Malik Abdulrahman, 2019. "The impact of social and environmental sustainability on financial performance: A global analysis of the banking sector," Journal of Multinational Financial Management, Elsevier, vol. 49(C), pages 35-53.
    10. Danisman, Gamze Ozturk & Tarazi, Amine, 2024. "ESG activity and bank lending during financial crises," Journal of Financial Stability, Elsevier, vol. 70(C).
    11. Manos, Ronny & Finger, Maya & Boukai, Haim, 2024. "Self-regulation for responsible banking and ESG disclosure scores: Is there a link?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 97(C).
    12. Shen, Chung-Hua & Wu, Meng-Wen & Chen, Ting-Hsuan & Fang, Hao, 2016. "To engage or not to engage in corporate social responsibility: Empirical evidence from global banking sector," Economic Modelling, Elsevier, vol. 55(C), pages 207-225.
    13. Kilian Huber, 2021. "Are Bigger Banks Better? Firm-Level Evidence from Germany," Journal of Political Economy, University of Chicago Press, vol. 129(7), pages 2023-2066.
    14. Elena Platonova & Mehmet Asutay & Rob Dixon & Sabri Mohammad, 2018. "The Impact of Corporate Social Responsibility Disclosure on Financial Performance: Evidence from the GCC Islamic Banking Sector," Journal of Business Ethics, Springer, vol. 151(2), pages 451-471, August.
    15. Guohua Feng & Bin Peng & Xiaohui Zhang, 2017. "Productivity and efficiency at bank holding companies in the U.S.: a time-varying heterogeneity approach," Journal of Productivity Analysis, Springer, vol. 48(2), pages 179-192, December.
    16. Curi, Claudia & Lozano-Vivas, Ana, 2020. "Managerial ability as a tool for prudential regulation," Journal of Economic Behavior & Organization, Elsevier, vol. 174(C), pages 87-107.
    17. Frederic Läger & Yassin Denis Bouzzine & Rainer Lueg, 2022. "The relationship between firm complexity and corporate social responsibility: International evidence from 2010–2019," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(3), pages 549-560, May.
    18. Moufty, Souad & Clark, Ephraim & Al-Najjar, Basil, 2021. "The different dimensions of sustainability and bank performance: Evidence from the EU and the USA," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    19. Massimiliano Cerciello & Francesco Busato & Simone Taddeo, 2023. "The effect of sustainable business practices on profitability. Accounting for strategic disclosure," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(2), pages 802-819, March.
    20. Woon Leong Lin & Chin Lee & Siong Hook Law, 2021. "Asymmetric effects of corporate sustainability strategy on value creation among global automotive firms: A dynamic panel quantile regression approach," Business Strategy and the Environment, Wiley Blackwell, vol. 30(2), pages 931-954, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:16:y:2024:i:2:p:679-:d:1317903. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.