Bank reputation and operational risk: The impact of ESG

Abstract

We investigate the relationship between environmental, social, and governance (ESG) combined scores and bank operational risk. Using a global sample of banks operating in 35 countries from 2011 to 2020, we find that higher ESG scores reduce bank operational risk. Findings, robust to selection bias and endogeneity, shed light on the role of ESG issues in the context of bank operational risk. Effects, in addition to increased capital absorption, impact bank reputational profiles. We provide new insights into the importance of risk management approaches and bank policies geared toward compliance with ESG principles and climate-related paradigms.