Abstract
This study analyzes the effect that banks’ investments in corporate social responsibility (CSR) have on bank performance. I find that banks’ investments in CSR have a positive impact on financial performance, measured in terms of both accounting performance and stock market value. However, not all CSR investments are the same. I distinguish between internal CSR and external CSR. This distinction is based on which constituents are most directly affected by the CSR initiatives. Separating bank CSR activities into internally focused and externally focused ones provides evidence on how different constituents value bank CSR activities. I find that CSR-related value creation is primarily a result of banks’ external investments and not a result of their internal investments. I also consider how internal and external CSR activities influence bank risk. I find that banks with higher CSR scores are less risky. This is driven by their external CSR investments and not by their internal CSR investments. Banks with a larger gap between internal and external CSR investments have worse performance, lower valuations, and greater risk than banks with a more balanced distribution between internal and external CSR investments. Banks which are committed to long-term structural CSR investments that benefit a broad community of stakeholders are rewarded by the financial markets. Moreover, from a regulatory policy perspective, these same banks are less risky and less likely to contribute to systemic macroeconomic risk.
Highlights
In mid-2018, ING, the largest bank in The Netherlands, announced that it would be incorporating specific climate change criteria in its lending decisions
Using data from the KLD Research & Analytics (KLD) database from 1998–2016, this study shows that banks with stronger corporate social responsibility (CSR) environments have better financial performance and higher valuation, measured by return on assets and by Tobin’s Q, respectively
Banks with stronger CSR environments have less risk, measured by both Z-score and whether the bank received funding under the U.S Treasury’s Troubled Asset Relief Program (TARP) in 2008–2009. In both the analyses related to bank performance and to bank risk, the benefits of CSR investments are driven by the banks’ external investments, focused on those stakeholders who are external to the bank rather than those who are internal to the bank
Summary
In mid-2018, ING, the largest bank in The Netherlands, announced that it would be incorporating specific climate change criteria in its lending decisions. Banks with stronger CSR environments have less risk, measured by both Z-score and whether the bank received funding under the U.S Treasury’s Troubled Asset Relief Program (TARP) in 2008–2009 In both the analyses related to bank performance and to bank risk, the benefits of CSR investments are driven by the banks’ external investments, focused on those stakeholders who are external to the bank (customers, borrowers, society) rather than those who are internal to the bank (employees, directors). This suggests that not all types of CSR initiatives have the same impact at banks and that these differences are realized in their financial results. A summary of conclusions and key implications is presented in the final section
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