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

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.