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How do ESG challenges affect default risk? An empirical analysis from the global banking sector perspective

Author

Listed:
  • Zbigniew Korzeb
  • Renata Karkowska
  • Anna Matysek-Jędrych
  • Paweł Niedziółka

Abstract

Purpose - A review of the literature provides a solid reason to believe that an increase in environmental, social and corporate governance (ESG) activities have a positive impact on banks’ default risk (DR). However, the increasing impact of climate risk on credit, operational and market risks, as well as the reduced availability of funding for banks that underperform in terms of ESG risk, is a concern. Therefore, the purpose of this study is to verify the relevance of the implementation of ESG policies to a bank’s DR, against the background of macroeconomic and bank-specific factors. Design/methodology/approach - Using a data set of 303 commercial banks from 61 countries from 2012 to 2021 and a panel regression methodology, the empirical importance of ESG activities for bank DR is documented. The two-stage generalized method of moments estimator was used to test the research questions. Findings - Comparing different factors, the results highlight the positive impact of ESG activities on the bank’s DR. However, this relationship varies according to the specific pillars of the bank’s sustainability policies and changes into negative ones. Originality/value - This paper fits the domain of DR management research, investigating whether ESG performance affects bank DR while controlling macroeconomic and market drivers. Prior literature has shown evidence on the relationship between macro and market forces and a bank’s risk profile while a limited one on the non-market drivers. The main contribution is to consider ESG (in total and as separate pillars) as independent drivers of the bank risk profile.

Suggested Citation

  • Zbigniew Korzeb & Renata Karkowska & Anna Matysek-Jędrych & Paweł Niedziółka, 2024. "How do ESG challenges affect default risk? An empirical analysis from the global banking sector perspective," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 42(1), pages 89-114, July.
  • Handle: RePEc:eme:sefpps:sef-09-2023-0540
    DOI: 10.1108/SEF-09-2023-0540
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    More about this item

    Keywords

    Sustainability; Default risk; Banking; ESG score; G21; G23; Q51; Q54;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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