Banks' ESG score, a de-risking business

​​You might have heard about the “ESG reporting burden” aiming at financial and later on non-financial firms reporting about their eligibility & alignment on all environmental objectives?

You might know as well that it is more and more difficult for financial institutions to ensure their long-term viability, measured among other KPIs by their Risk and Performance Ratios.​If this is the case, then you could be interested in the results of our research, evidencing a positive impact of Sustainability on the banks’ reliability.

Instead of the additional costly constraint it could represent, adopting an ESG compliant strategy and sticking to it is proving viable in the long run by strengthening the whole financial system.

Although most examinations focus on the impact of ESG on profitability, the impact on financial stability cannot be underconsidered. That is why, in our study, we focused on the positive impact of the ESG score rather on the banks’ soundness than on their profitability.

We have found that the higher the ESG score of the European Financial Institutions, the better their risk profile, measured through the Non-Performing Loans (NPL) Ratio, representing the proportion of the total of loans that are in default or close to default, itself being closely monitored by the Competent Authorities.

Our hypothesis was based on the assumption that the Financial Institutions’ ESG scoring is improving their capacity to attract good payers and/or better assesses the borrowers’ capacity to pay their dues. Indeed, a sustainable bank focused on eco-friendly and ethical lending practices may have lower exposure to industries with high environmental risk, attract more stable customers, and have a robust and transparent management, which leads to informed decisions and better assessment of loan risks.