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Do Sustainability Risks Affect Credit Ratings? Evidence from European Banks

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  • Reyes Samaniego-Medina

    (Pablo de Olavide University, Seville, Spain)

  • Pilar Giraldez-Puig

    (Pablo de Olavide University, Seville, Spain)

Abstract

Targets defined in accordance with Environmental, Social and Governance (ESG) criteria confront the business world, particularly the banking industry, with new challenges. The aim of this paper is to study the effect of ESG controversies on the credit rating of the European banking sector, involving 65 European banks from 18 countries in the 2011-2020 period. This empirical study includes different approaches. Firstly, we apply an ordered logit model to ascertain the influence of ESG concerns on credit ratings. Secondly, we analyse the impact of ESG controversies on the probability of obtaining a better rating scale through the marginal effects. And finally, we use matching analysis to measure the real impact of ESG controversies on credit ratings. Our findings suggest that ESG controversies have a negative effect on credit rating. In addition, it is a relevant negative factor in the probability of obtaining a better rating in future reviews of credit assessments. Specifically, the lower the level of ESG controversies, the greater the probability of achieving the highest credit ratings. This research provides a comprehensive view of the impact of ESG controversies on credit ratings awarded to European financial institutions. European banks should take special care to avoid such controversies, as a source of reputational risk, when setting their policies so that their credit ratings would not be affected.

Suggested Citation

  • Reyes Samaniego-Medina & Pilar Giraldez-Puig, 2022. "Do Sustainability Risks Affect Credit Ratings? Evidence from European Banks," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 24(61), pages 720-720, August.
    • Handle: RePEc:aes:amfeco:v:24:y:2022:i:61:p:720
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    Cited by:

    1. Beckmann, Joscha & Rogmann, Jennifer, 2024. "Determinants and effects of country ESG controversy," Energy Economics, Elsevier, vol. 131(C).
    2. Zavatin Iuliana & Ene Constantin Andreea Bianca & Bujor Dragoș & Frațiloiu Bogdan Alexandru, 2023. "Study on the Impact of Organizational Culture, Knowledge Management and Digitalization on Sustainable Leadership," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 17(1), pages 1702-1715, July.
    3. Zbigniew Korzeb & Paweł Niedziółka & Danuta Szpilko & Filippo Pietro, 2024. "ESG and climate-related risks versus traditional risks in commercial banking: A bibliometric and thematic review," Future Business Journal, Springer, vol. 10(1), pages 1-22, December.
    4. Yasemin Lheureux, 2024. "Predictive insights: leveraging Twitter sentiments and machine learning for environmental, social and governance controversy prediction," Journal of Computational Social Science, Springer, vol. 7(1), pages 23-44, April.

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    More about this item

    Keywords

    banking sector; credit rating; environmental; social and governance (ESG); controversy.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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