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The role of Environmental, Social, and Governance (ESG) in predicting bank financial distress

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  • Citterio, Alberto
  • King, Timothy

Abstract

We analyze the predictive power of Environmental, Social, and Governance (ESG) indicators to forecast bank financial distress using a sample of 362 commercial banks headquartered in the US and EU-28 members states from 2012 to 2019. Our results demonstrate that ESG improves the predictive capability of our model to correctly identify distress. Notably, ESG strongly reduces the likelihood of misclassifying distressed/defaulted banks as healthy. Our model, which we estimate using six alternative approaches, including traditional statistical techniques, machine learning approaches, and ensemble methods, has implications for both practical implications by banking sector supervisors, as well as literature on default prediction.

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  • Citterio, Alberto & King, Timothy, 2023. "The role of Environmental, Social, and Governance (ESG) in predicting bank financial distress," Finance Research Letters, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:finlet:v:51:y:2023:i:c:s1544612322005888
    DOI: 10.1016/j.frl.2022.103411
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    Cited by:

    1. Yin Shi & Xiaoni Li & Maher Asal, 2023. "Impact of sustainability on financial distress in the air transport industry: the moderating effect of Asia–Pacific," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-23, December.
    2. Massimo Arnone & Angelo Leogrande, 2024. "The Sustainability Of The Factoring Chain In Europe In The Light Of The Integration Of Esg Factors," Working Papers hal-04629337, HAL.
    3. Arnone, Massimo & Laureti, Lucio & Costantiello, Alberto & Anobile, Fabio & Leogrande, Angelo, 2024. "Banking Stability in the Context of the ESG Model at World Level," MPRA Paper 121617, University Library of Munich, Germany.
    4. Zhang, Xing & Li, Yiwen & Ji, Mingcan & Wang, Jiabian, 2024. "Does ESG help reduce the goodwill impairment?—From perspectives of information increment and information manipulation," Finance Research Letters, Elsevier, vol. 64(C).
    5. Zhang, Tianjiao & Zhu, Weidong & Wu, Yong & Wu, Zihao & Zhang, Chao & Hu, Xue, 2023. "An explainable financial risk early warning model based on the DS-XGBoost model," Finance Research Letters, Elsevier, vol. 56(C).
    6. Dhasmana, Samriddhi & Ghosh, Sajal & Kanjilal, Kakali, 2023. "Does investor sentiment influence ESG stock performance? Evidence from India," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    7. Jiajia Liu & Zhenzhen Ge & Yahan Wang, 2024. "Role of environmental, social, and governance rating data in predicting financial risk and risk management," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 260-273, January.
    8. Lee, Chien-Chiang & Wang, Chih-Wei & Hong, Pei-Hsuan & Lin, Weizheng, 2024. "Environmental policy stringency and bank risks: Does green economy matter?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    9. Bruno, Elena & Iacoviello, Giuseppina & Giannetti, Caterina, 2024. "Bank credit loss and ESG performance," Finance Research Letters, Elsevier, vol. 59(C).
    10. Palmieri, Egidio & Ferilli, Greta Benedetta & Altunbas, Yener & Stefanelli, Valeria & Geretto, Enrico Fioravante, 2024. "Business model and ESG pillars: The impacts on banking default risk," International Review of Financial Analysis, Elsevier, vol. 91(C).
    11. Zhang, Hao & Zhu, Yimeng, 2024. "Financial knowledge, executive decision making and enterprise innovation," Finance Research Letters, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    Financial distress; Bank default; Prediction models; ESG;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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