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How Important Are Esg Factors For Banks’ Cost Of Debt? An Empirical Investigation

Author

Listed:
  • Stefano Nobili

    (Bank of Italy)

  • Mattia Persico

    (Bank of Italy)

  • Rosario Romeo

    (Bank of Italy)

Abstract

The paper examines the relationship between banks’ ESG (environmental, social and governance) scores and their funding costs. It also provides empirical insights into the question of whether investors consider changes in ESG scores when making investment decisions. The analysis focuses on bonds issued by euro-area banks between 2015 and 2022. The findings show that banks with better ESG ratings see a positive impact on their cost of funding; among individual scores (E, S, G), governance (G) proves to be the most significant in the reduction of the cost of funding. Then, based on a panel event study model, the analysis shows that ESG rating changes have a significant effect on banks’ bond yields: the spread to maturity tends to increase after downgrades and decrease after upgrades. Additionally, the results indicate that the effects of downgrades and upgrades are not symmetrical: in the medium term, the impact of the latter is actually more significant and persistent.

Suggested Citation

  • Stefano Nobili & Mattia Persico & Rosario Romeo, 2024. "How Important Are Esg Factors For Banks’ Cost Of Debt? An Empirical Investigation," Temi di discussione (Economic working papers) 52, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:mip_052_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/mercati-infrastrutture-e-sistemi-di-pagamento/approfondimenti/2024-052/N.52-MISP.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    ESG ratings; bond yield spreads; panel event study;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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

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