Impact of ESG on Bank Performance and Risk Around the COVID-19 Pandemic

Abstract

Financial institutions’ focus on using ESG (environmental, social, and governance) criteria in decisions has grown significantly over time despite growing controversy over its use. Prior papers have not solved the controversy as they have found mixed results of the benefits of ESG activity. Further, there may have been structural changes that accompanied the pandemic’s period of economic stress. The paper examines the relation between ESG scores and financial institutions’ risk and performance measures. Pre-pandemic changes to ESG and its components are regressed on pandemic-period changes in ROA, ROE, and Tobin’s Q for performance and the loan-to-deposit ratio for risk. Changes to ESG are negatively related to the subsequent performance of ROA. However there appears to be no significant relation between changes in ESG and changes to other measures of performance. Finally, when looking at the loan-to-deposit ratio, there is evidence that changes in the environmental factor, the social factor, and the overall ESG score has a significant and negative relation. That suggests ESG score improvement is associated with lower risk. Although financial institutions improving their ESG scores is associated with subsequent risk reduction, that does not appear to have a positive performance impact.