Abstract
The concept of sustainable banking has developed significantly in recent years. Previous research found that corporate social responsibility reduces firm risk, yet this empirical evidence refers almost exclusively to non-financial companies and it remains unclear whether the risk-mitigating effect stems from the environmental, social, or governance pillar. The paper aims to analyse the impact of corporate social responsibility activities on bank risk and to explore its determinants. Using a sample of 582 banks worldwide over the period from 2002 to 2018, we confirm a risk-reducing effect of the corporate social responsibility activity on an aggregated level. The decomposition of this effect suggests that environmental activities determine this risk mitigation. In contrast, social and governance activities do not show similarly unambiguous results. In this way, our analysis highlights the great importance of environmental aspects in banks’ risk management.
Highlights
Sustainability has become one of the most pressing issues for society (United Nations 2015)
We contribute to the literature in the following ways: whereas the majority of studies explore the effects of corporate social responsibility (CSR) on firm risk for non-financial companies, our focus is on banks
We examine the effect of CSR on bank risk at an aggregate CSR level, both individually for the three CSR pillars as well as for the pillars’ ten sub-components
Summary
Sustainability has become one of the most pressing issues for society (United Nations 2015). Movements such as ‘Fridays for Future’ have recently contributed to the publicly perceived relevance of this topic in the context of climate change. A widely recognised definition of sustainability is a broad understanding of the term, one that is limited to ecological issues. Petras operationalised as their corporate social responsibility (CSR), which is a management concept that integrates environmental, social, and ethical aspects of business operations into decision-making processes (Sassen et al 2016). Companies’ CSR activities can be assessed on the basis of scores for environmental, social, and governance (ESG) performance (Chollet and Sandwidi 2018; Nofsinger et al 2019)
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