Bank credit loss and ESG performance

Abstract

We study the impact of ESG scores on Non-performing loans (NPLs) for a sample of European listed banks over the period 2002–2020. Relying on two different types of instrumental variables and fractional logit estimations, we find that banks with greater levels of the ESG score have higher levels of NPLs. The main effect goes through the Governance pillar and Controversies components. Our findings suggest that even if ESG practices may enhance bank value and stability, a negative effect may directly emerge from the loan loss channel.