Banks and environmental, social and governance drivers: Follow the market or the authorities?

Abstract This paper goes beyond the relationship between a bank ESG performance (ESGP) and corporate financial performance (CFP). Here, the link between ESG factors and financial benchmarks is analysed to verify whether banks may find in the market reaction sufficient stimuli (higher CFP) to adopt ESG conduct spontaneously. Using panel estimation methods on European banks listed in STOXX Europe 600, between 2008 and 2019, this paper tests the relationship between ESGP and CFP considering different dimensions of financial performance at once, both accounted‐based (ROA and ROE) and market‐based (Capitalisation to Book Value, Tobin's Q). Besides, we employ VBM (EVA Spread) not previously considered. The main findings support the current approach of banking authorities, focusing on bank ESG risks, more than ESG opportunities, in order to “force” banks into adopting a new ESG business model, at this early stage of transition to sustainability.