ESG Scores and Financial Performance : Evidence from systemically important banks in Europe

As environmental, social and governance (ESG) factors become increasingly more important to consumers, corporate strategies and priorities have also started to accordingly change. Financial institutions play a huge role in society and therefore play a key role in driving sustainable practices highlighted by ESG initiatives. Previous research suggests that there generally is a positive relationship between financial- and ESG performance, suggesting that ESG efforts return some sort of value. The results do however vary across countries and studied contexts. This thesis therefore aims to investigate if there is a relationship between performance and ESG-scores within the European banking sector. Focus will be on European banks that pass ECB’s threshold of 30 billion euros to be considered systematically impactful and significant. This sample also ensures comparability in legal obligations and economic influence. Performance will be measured through both accounting based (ROA & ROE) and market based (Tobin’s Q) measures to offer a more comprehensive view of how ESG could correlate with performance. The goal is for any findings to contribute to existing theory by applying and testing legitimacy-, institutional and stakeholder theory to a European banking context, where regulatory and societal norms could differentiate impacts of ESG from the rest of the world. Beyond theoretical contributions, the study could give investors insights into ESG and if it should be factored into valuation models or other investment decisions. If a positive relationship is found, ESG initiatives should be looked upon as a strategic tool for growth and not only as an ethical indicator of operations. Furthermore, insights could be given to all stakeholders on whether ESG commitments by banks translate into meaningful and measurable outcomes. The empirical findings of the study indicate that regional differences due to some extent result in variation in financial performance for European systemically important banks. At the continental level, no significant relationship was found between ESG scores and any of the three chosen measures of performance. However, the regional analysis revealed that there are some regions that are affected by some ESG-pillars more than others. Both positive and negative statistically significant results were found for ESGE and ESGG, indicating that regions perceive the ESG-pillar differently. No significant effects were observed for the social pillar (ESGS) across any region. Overall, ESG's impact on financial performance is not uniform, but highly contingent on regional dynamics and the specific ESG dimension considered. These findings emphasize that ESG impacts are highly context-dependent, reinforcing the importance of regional and institutional factors in determining whether ESG initiatives lead to measurable financial benefits.