The relationship between environmental, social, and financial performance in the banking sector: A European study

There is a growing interest in assessing environmental performance, social responsibility, and corporate governance (ESG) in the banking sector. Also, significant relationships are expected between ESG dimensions and corporate financial performance. The purpose of this research is to analyze the relationships between ten dimensions of the environmental, social, and governance pillars and bank financial performance, for the decade after the 2008 financial crisis. Data was collected from the Refinitiv database for 39 European banks, for the period 2010–2019. Our results show a positive relationship between emission reductions and financial performance. However, a bank’s accounting and market performance may be at odds with its product quality and social responsibility policies. Moreover, an increase in the quality of a bank’s corporate governance system was found to negatively affect company financial performance. Our results have multiple theoretical implications. The predictions related to stakeholder theory and the resource-based view were confirmed, as banks show interest in resource efficiency, environment-aware products and services, and process digitization. On the other hand, the prediction of stakeholder theory regarding the positive relationship between corporate social responsibility and financial performance was rejected. Also, corporate governance quality has a negative contribution to accounting performance and market valuation, going against the hypotheses of agency theory. This could mean that market investors do not value a bank’s involvement in social responsibility initiatives and do not endorse the adoption of best governance practices that could reduce the riskiness of a bank’s portfolio. These findings have practical implications for bank managers and company boards in selecting and disclosing ESG policies and initiatives. [Display omitted] •Emission and waste reductions are positively associated with bank profitability.•Lagged emission and waste reductions have a positive effect on market performance.•Lagged product responsibility has a negative effect on bank financial performance.•CSR strategy and governance quality have a negative effect on market performance.•An increase in corporate governance quality has a negative effect on profitability.