Do ESG strategies enhance bank stability during financial turmoil? Evidence from Europe

This paper investigates the joint and separate effects of Environmental (E), Social (S), and Governance (G) scores on bank stability. Using a sample of European banks operating in 21 countries over 2005-2017, we find that the total ESG score, as well as its sub-pillars, reduces bank fragility during periods of financial distress. This stabilizing effect holds strongly for banks with higher ESG ratings. These results are confirmed by a differences-in-differences (DID) analysis built around the introduction of the EU 2014 Non-Financial Reporting Directive (NFRD). Our evidence also reveals that, in times of financial turmoil, the longer the duration of ESG disclosures, the greater the benefits on stability. Finally, we show that the ESG-bank stability linkages vary significantly across banks' characteristics and operating environments. Our findings are robust to selection bias and endogeneity concerns. Overall, they support the regulatory effort in requiring an enhanced disclosure of non-financial information.

Automated summary

The study finds that the total ESG score, as well as its sub-pillars, have a stabilizing effect on bank fragility, especially during financial crises, with higher ESG rated banks experiencing more significant stability improvements. Additionally, the longer the duration of ESG disclosures, the greater the benefits on stability. The linkages between ESG and bank stability vary significantly across banks' characteristics and operating environments, supporting regulatory efforts to enhance non-financial information disclosure.