ESG controversies and bank risk taking

Abstract

This study investigates how environmental, social, and governance controversies affect bank risk taking. By estimating a dynamic panel data model from 2011 to 2020, we find evidence that banks with fewer ESG controversies take less risk. Banks with a lower number of ESG controversies show their compliance with the implementation of ESG strategies to reduce risk, as evidenced by lower risk-weighted assets and higher Z-scores. The present study supports the recent guidelines on climaterelated and environmental risks published by the Basel Committee on Banking Supervision and the European Central Bank. Therefore, the main results strengthen the need for the integration not only of social and governance risks but also of climaterelated and environmental risks in banks' risk management framework.

Sustainable development, disclosure to stakeholders and the Sustainable Development Goals: Evidence from Brazilian banks' non‐financial reports

“…The perception that banks are unsustainable can influence even the amount of deposits received by them (Galletta et al, 2021). And the more environmental, social and governance controversies banks have, the greater their banking risk taking will be, according to Galletta and Mazzù (2022).…”

Environmental, social and governance controversies: the role of European bank boards

“…Recent research by Bang et al (2023) emphasizes the influence of ESG controversies on investor decisions, particularly evident in trading activities that react to news related to such controversies. This potentially tarnishes the firm reputation and influences its value (Aouadi and Marsat, 2018;Cicchiello et al, 2023;Galletta and Mazz u, 2023), thus affecting the financing costs borne by investors (La Rosa and Bernini, 2022). Luo (2021) assert that investors shoulder a substantial portion of the overall cost of ESG controversies, intensifying their incentive to minimize exposure to such issues.…”

“…Azmi et al, 2021;B atae et al, 2021;Chiaramonte et al, 2022;Neitzert and Petras, 2022), ESG controversies have been almost completely neglected. Only a recent paper by Galletta and Mazz u (2023) has started to address this gap, demonstrating that banks characterized by reduced ESG controversies tend to exhibit lower risk levels. Consequently, this study shifts its focus to the scrutiny of internal corporate governance mechanisms, with a specific emphasis on the attributes of the board of directors.…”

Assessing the impact of corporate environmental performance on efficiency improvement in labor investment

“…While the trend toward increased focus on ESG is clear, there is still some debate about the exact impact of ESG on investment efficiency (Bhattacharya & Sharma, 2019; Galletta & Mazzu, 2023; Surroca et al, 2010). Regarding this relationship, two views prevail in the literature.…”

“…Prioritizing social and environmental issues and taking steps to address them can help to reduce the risk of insider misconduct, as well as provide a more secure and profitable environment for investors/creditors. A focus on ESG performance discloses more nonfinancial information, which in turn improves information transparency of the enterprises, and thus reduces the risk for creditors (Bhattacharya & Sharma, 2019; Galletta & Mazzu, 2023). Besides, by establishing clear CSR policies and procedures, companies can also demonstrate their commitment to ethical behavior and accountability, which can help to reassure investors and build trust in the company and its management.…”