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Does ESG performance reduce banks’ nonperforming loans?

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  • Liu, Suyi
  • Jin, Justin
  • Nainar, Khalid

Abstract

This study investigates the association between a bank's nonperforming loans and its ESG (environmental, social, and governance) performance. Using data from U.S. commercial banks, we find that a bank's ESG rating is negatively associated with its nonperforming loans. Furthermore, we document that a bank's high performance in all three pillars of ESG evaluation reduces its ratio of nonperforming loans. Our study finds that a bank's favorable ESG performance improves its loan quality and provides archival evidence of the importance of all three pillars of ESG.

Suggested Citation

  • Liu, Suyi & Jin, Justin & Nainar, Khalid, 2023. "Does ESG performance reduce banks’ nonperforming loans?," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002313
    DOI: 10.1016/j.frl.2023.103859
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    Cited by:

    1. Danisman, Gamze Ozturk & Tarazi, Amine, 2024. "ESG activity and bank lending during financial crises," Journal of Financial Stability, Elsevier, vol. 70(C).
    2. Pandey, Dharen Kumar & Kumari, Vineeta & Palma, Alessia & Goodell, John W., 2024. "Impact of ESG regulation on stock market returns: Investor responses to a reasonable assurance mandate," Finance Research Letters, Elsevier, vol. 64(C).
    3. Agnese, Paolo & Cerciello, Massimiliano & Oriani, Raffaele & Taddeo, Simone, 2024. "ESG controversies and profitability in the European banking sector," Finance Research Letters, Elsevier, vol. 61(C).
    4. Bruno, Elena & Iacoviello, Giuseppina & Giannetti, Caterina, 2024. "Bank credit loss and ESG performance," Finance Research Letters, Elsevier, vol. 59(C).
    5. Wei, Feng & Zhou, Lei, 2024. "Do state-owned enterprises prefer capital from private enterprises with better ESG performance? Evidence from China's mixed ownership reforms," Finance Research Letters, Elsevier, vol. 62(PA).

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