Assessing resilience in banking: the influence of ESG on credit risk during economic crises

Purpose. This study explores the interconnection between financial crises and sustainability in the banking sector, highlighting how crisis scenarios expose systemic vulnerabilities and the resulting need for responsible risk management. In this context, the research investigates whether ESG disclosure reduces credit risk in European listed banks, measured through Non-Performing Loans (NPLs), during the period 2009 - 2019. Design. The study is based on a sample of 192 listed banks from the 27 European Union countries over the period 2009 - 2019. Panel regression models, supported by robustness tests, are employed to examine the impact of ESG scores considered both in their aggregated and disaggregated dimensions on credit risk. Findings. The social disclosure score is negatively and significantly associated with NPL levels, suggesting that greater transparency in social practices strengthens credit quality. By contrast, the environmental and governance dimensions show no significant relationships. This suggests that greater transparency in banks' social practices can contribute to lower credit risk and improved financial stability. Originality. This study provides an original contribution by showing that, among the ESG dimensions, only social disclosure significantly reduces credit risk, as measured by NPLs. Based on a sample of European-listed banks in the post-crisis period, the evidence demonstrates that transparency in social practices is a strategic driver of credit quality and financial resilience. The research thus offers valuable insights for both policymakers and banking practitioners.