Does Fossil Fuel Financing Affect Banks’ ESG Ratings?

Michał Bernardelli,Paweł Niedziółka,Zbigniew Korzeb

doi:10.3390/en15041495

Michał Bernardelli, Paweł Niedziółka + Show 1 more

Open Access

https://doi.org/10.3390/en15041495

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Abstract

The study was conducted on a sample of 60 of the world’s biggest banks financing the largest fossil fuel entities. The aim is to identify the determinants of ESG ratings of these banks and to determine how relevant their actual credit and investment exposure is to this assessment. The indirect objective is also an examination of whether coal power financing affects ESG ratings. Two logistic regression models have been explored: one dedicated to the identification of high ESG risk banks and the second to predict low ESG risk, which thereafter were combined into one final model. The results indicate that an increase in the Sustainable Development Index (SDI) translates into a decline in the odds of being assigned to the high-risk ESG group relative to the probability of being qualified to the low- or medium-risk ESG group. This study is the first to analyse the impact of actual exposures of the world’s largest banks to the fossil fuels sector on their ESG ratings. The value added is the use of a unique database, the focus on actual rather than declared effects of banks’ policies, and the use of a two-stage logistic regression model construction. The proved relationships are important and of practical relevance to bank managers, regulators, and ESG rating providers. Since the research is conducted on the basis of ESG provided only by one rating agency verification of conclusions with the use of ratings of other agencies, confronting benefits from financing the fossil fuels sector with losses resulting from an increase in the cost of obtaining financing are only selected directions for further research.

Highlights

Accepted: February 2022The European Union, in its ‘2030 Climate Target Plan’ announced on September2020, set a new goal of climate neutrality, understood as the decarbonisation of national economies and the reduction of oil and gas consumption, to be achieved in 2050
A rise in AVR_G by unit, ceteris paribus, results in an approximately 500% increase in the chance of a bank being classified in the least ESG risk group relative to the chance of being considered moderately or very risky according to the ESG classification
In 2020, as many as 33 of these 60 banks saw an increase in their exposure to fossil fuel financing

Summary

Introduction

2020, set a new goal of climate neutrality, understood as the decarbonisation of national economies and the reduction of oil and gas consumption, to be achieved in 2050. The initiatives of international organisations in the area of climate agreements, and in particular the measures taken by the European Union in the context of the need to prioritise environmental and climate protection issues in economic activities, have been reflected in the functioning of commercial banks. The consideration of environmental, social, and governance factors, referred to as ESG factors, in banking activities dates back to the 1990s [1], well before the coinage of the ESG acronym that has been in place since 2004. The E factor refers to the evaluation of criteria related to the implementation of environmental strategy and policy, environmental management, Published: 17 February 2022

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