Abstract
This paper examines the determinants of sustainability performance in the financial industry at the firm, country and legal origin levels. Through the analysis of the ESG score in a sample of 64 countries with 982 financial firms during the period between 2002 and 2018, we find that legal origin is a significant explanatory variable. In particular, our findings indicate that companies based in civil-law countries show higher values of ESG performance than their counterparts in common-law countries, suggesting the prevalence of the stakeholder theory in explaining the willingness of financial firms to engage in sustainability practices. Moreover, and following the assumptions of the “good governance” view, we also assess the joint the effect of corporate governance and legal origin ESG scores, finding that corporate governance structures emerge as a substitution mechanism of sustainability enhancement for financial firms based in common-law countries.
Highlights
Legal Origin and CorporateUnder the classical approach to business economics analysis, managers should focus their effort toward maximizing shareholder wealth through profits
When we assess this association in financial firms based in Scandinavian countries, we only find an augmented effect in the case of Board tenure, and no statistical differences for board size or for the proportion of non-executive directors in the Board
This paper aims to examine whether the country’s legal origin is an important determinant of ESG performance in the financial industry, and if there is a joint effect between corporate governance structures and legal origin in the explanation of financial firms’ sustainability scores
Summary
Legal Origin and CorporateUnder the classical approach to business economics analysis, managers should focus their effort toward maximizing shareholder wealth through profits. Recent studies have highlighted the increasing importance of ESG issues in banks’ policies following the financial crisis, and some of them have even defined the concept of a sustainable bank as a bank that aims to serve the interests of all its stakeholders and not just its shareholders, investing money responsibly considering both financial and non-financial outcomes, behaving ethically in its intermediation role, and contributing to the stability of the whole system through the adoption of governance structures that limit excessive risk-taking [4,5] In this vein, a recent stream of literature has emerged with the aim to explain the old controversy between the classical assumptions of companies’ goals and recent empirical evidence concerning the rising trend of investments in social and environmental activities [2]. Some explain the causes of companies enhancing sustainable activities from a firm-level perspective (such as agency, good governance and legitimacy theories), while others adopt a more aggregated country-level view (institutional theory)
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