Corporate Governance and ESG Controversies: Navigating Risk‐Taking in Banks

ABSTRACT This study examines the impact of environmental, social, and governance (ESG) controversies on bank risk, focusing on the moderating role of corporate governance. Using a dynamic panel dataset of 88 European banks from 2013 to 2020, we analyze two key risk measures: the Z‐score, indicating financial stability, and risk‐weighted assets (RWAs), reflecting risk exposure. The findings reveal that banks facing ESG controversies are exposed to heightened risk, with corporate governance playing a crucial role in moderating these effects. Strong governance structures, characterized by board diversity and independence, are found to mitigate the financial risks associated with ESG controversies, whereas weak governance amplifies these risks. Our results contribute to the growing literature on ESG and bank risk by highlighting the complexities introduced by ESG controversies and the essential role of governance in managing these risks. These insights are relevant for both academics and practitioners seeking to enhance risk management frameworks in the banking sector.