Knowledge of ESG Factors and Firm Efficiency for Supporting the Bank Risk-Taking: An Empirical Analysis

Giovanni Baldissarro;Maria Elena Bruni;Gianpaolo Iazzolino;Donato Morea;Stefania Veltri

2023-01-01

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Abstract

Knowledge of the Environmental, social, and governance (ESG) factors is the subject of increasing interest in national and international institutions. Within the banking sector, there is a growing awareness of the need to integrate the non-financial information arising to ESG factors knowledge, into strategies, processes, and financial instruments to generate long-term value. ESG are increasingly considered as a new factor influencing risk in bank’s lending activity, and this is the perspective of our paper. Adopting a bank-centered perspective, the main aim of the paper is to investigate, employing a Data Envelopment Analysis (DEA)-based approach whether including ESG factors in the creditworthiness assessment of borrowers increases the firms’ efficiency, thus mitigating bank risk taking. The research has been carried out on a sample of European listed firms in the energy sector, which is under increasing pressure from society due to its huge environmental footprint and social importance. Our findings do not provide evidence of the overall significance of ESG factors in affecting firm efficiency. Nevertheless, we provide evidence that high/low ESG scores do not affect firm efficiency, but at moderate level, ESG scores improve the corporate efficiency. The findings contribute (and provide suggestions) for regulators, credit risk managers, and academics.