<scp>ESG</scp> Initiatives and Reputational Recovery in Banking: Do Banks Do Good After Doing Wrong?

ABSTRACT This study examines the compensatory effect of ESG initiatives in the banking sector, focusing on how banks respond to reputational damage following ESG‐related controversies. Using a dataset of 84 of the world's largest banks, we find a significant increase in ESG scores in the year of an ESG controversy, with the effect persisting for up to 2 years. The compensatory effect is statistically significant across key ESG subindices, including emissions, environmental innovation, resource use, human rights, community, workforce scores, and management. However, the response varies depending on bank characteristics—banks with lower asset volumes and lower profitability and those with a stronger media presence exhibit a weaker compensatory effect. These findings suggest that ESG initiatives serve as a strategic tool for managing reputational risk, especially for large and profitable institutions. Nevertheless, new technologies give banks an opportunity to use alternative reputation management strategies, such as perception management via media, rather than focusing on genuine ESG improvements. This study offers new insights into ESG as both a reactive and strategic instrument in corporate reputation management within the banking industry.