The impact of ESG scores on the value relevance of fair value hierarchy of financial instruments: Evidence from European Banks

Using hand-collected accounting data on 154 European banks, we investigate the impact of ESG scores on the value-relevance of the fair value hierarchy (FVH) of financial instruments held on their balance sheets. Our findings are multi-faceted. Banks that possess an ESG score are valued at a premium on book value and the presence of the ESG score is associated with lower (higher) value-relevance of the reported fair value of Level 1 (Level 2 and 3) items. The value relevance of Level 2 and 3 FVH levels, however, decreases in the ESG score. These findings imply that, while availability of ESG scores proxies for market visibility, stock market investors either do not treat the ESG score as a reliable measure of ESG performance or, embracing the "overinvestment view" rather than the "risk mitigation view" of Corporate Social Responsibility (CSR), do not associate positive ESG performance to greater corporate transparency and trustworthiness.