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Understanding Reputational Risks: The Impact of ESG Events on European Banks

Author

Listed:
  • Erdinc Akyildirim

    (University of Zurich)

  • Shaen Corbet

    (Dublin City University ; University of Waikato - Management School)

  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • David Staunton

    (Central Bank of Ireland)

Abstract

This study examines the financial impact of Corporate Social Irresponsibility (CSI) events on European banks. Exploiting a dataset of 11,832 reputational shocks from 2007 through 2023, we find evidence of significant negative abnormal stock returns and increased volatility following CSI media coverage. High-severity media coverage, as well as the reporting of previously unknown problems, increases the magnitude of the shock. We complement the main analysis with a rich dataset of bank characteristics to explain variations in the results, finding that proactive ESG engagement buffers against reputational risks. European banks with higher deposit instability exhibit especially negative short-term returns, reflecting the interconnections between investor and depositor behaviour. Changes in total deposits that coincide with negative CSI news magnify the effect on stock prices and volatility. A range of placebo testing procedures are employed to demonstrate that these effects are specific to the bank-level CSI events in our data and not caused by general market noise. The findings underscore the importance of ESG risk management strategies in foreseeing and mitigating adverse reactions from investors and depositors.

Suggested Citation

  • Erdinc Akyildirim & Shaen Corbet & Steven Ongena & David Staunton, 2024. "Understanding Reputational Risks: The Impact of ESG Events on European Banks," Swiss Finance Institute Research Paper Series 24-39, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2439
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    More about this item

    Keywords

    Banking; Reputation; Sentiment; ESG; Abnormal Returns; Volatility;
    All these keywords.

    JEL classification:

    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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