Do ESG scores effect bank risk taking and value? Evidence from European banks

We examine whether environmental, social and governance (ESG) scores of European banks impact on their risk-taking behavior and on bank value. We find that high ESG scores are associated with a modest reduction in risk-taking for banks that are high or low risk-takers, and that the impact is conditional on executive board characteristics. These findings are consistent with the “stakeholder” view of ESG activities. However, high ESG scores are also associated with a reduction in bank value consistent with the “overinvestment” view of ESG whereby scare resources are diverted from investment. The decline in bank value occurs notwithstanding a positive indirect link between ESG scores and bank value through their impact on risk taking. We conclude that there is a trade-off between reducing bank risk-taking and a more stable financial system on the one hand and bank value on the other.