When interest rates rise, ESG is still relevant – The case of banking firms

• ESG factors remain vital for banking outcomes despite rising interest rates. • Analysis includes banks from 27 EU countries from Q3 2022 to Q1 2024. • Banks with higher ESG scores show better risk-adjusted performance. • Strong ESG profiles result in lower credit infections and improved asset quality. • Findings highlight ESG's robust role in banking, regardless of interest rates. This study assesses whether ESG performance continues to drive banking outcomes during an unprecedented increase in interest rates. Analyzing a sample of banks from twenty-seven EU countries from Q3 2022 to Q1 2024, we find that ESG factors remain crucial for banking performance. Our evidence suggests that banks with fewer ESG controversies and higher ESG scores exhibit better risk-adjusted performance. Furthermore, institutions with stronger ESG profiles experience lower credit infections and consequently maintain better asset quality. These findings underscore the robust role of ESG factors in banking performance, regardless of interest rate regimes.