ESG relevance in credit risk of development banks

This paper investigates relevance of Environmental, Social, and Governance (ESG) risks in the context of banks' credit risk. Focusing on a global sample of 567 banks, including 40 development banks, we aim to discern nuances in ESG relevance scores between different bank types. Our findings highlight distinct differences between national and multilateral development banks, with ESG risk significantly influencing credit risk in the latter. Notably, social and governance factors play pivotal roles in shaping credit profiles. Development banks, at the forefront of promoting good ESG practices, face heightened exposure and risks. This paper contributes to the understanding of the evolving dynamics of ESG impact on creditworthiness. • We explain differences in risk-based ESG relevance scores between development and conventional banks. • Social and governance factors are more relevant than environmental factors on banks' credit risk. • Environmental risks are relatively insignificant at the individual bank level but may be relevant at the sectoral level. • Multilateral development banks face higher ESG risks, particularly in governance. • ESG risks are significantly less relevant for national development banks in comparison to multilateral development banks.