Does Fossil Fuel Financing Affect Banks’ ESG Ratings?

Abstract

The study was conducted on a sample of 60 of the world’s biggest banks financing the largest fossil fuel entities. The aim is to identify the determinants of ESG ratings of these banks and to determine how relevant their actual credit and investment exposure is to this assessment. The indirect objective is also an examination of whether coal power financing affects ESG ratings. Two logistic regression models have been explored: one dedicated to the identification of high ESG risk banks and the second to predict low ESG risk, which thereafter were combined into one final model. The results indicate that an increase in the Sustainable Development Index (SDI) translates into a decline in the odds of being assigned to the high-risk ESG group relative to the probability of being qualified to the low- or medium-risk ESG group. This study is the first to analyse the impact of actual exposures of the world’s largest banks to the fossil fuels sector on their ESG ratings. The value added is the use of a unique database, the focus on actual rather than declared effects of banks’ policies, and the use of a two-stage logistic regression model construction. The proved relationships are important and of practical relevance to bank managers, regulators, and ESG rating providers. Since the research is conducted on the basis of ESG provided only by one rating agency verification of conclusions with the use of ratings of other agencies, confronting benefits from financing the fossil fuels sector with losses resulting from an increase in the cost of obtaining financing are only selected directions for further research.

Environmental, social, and governance ratings and financial performance: Evidence from the European food industry

“…The financial sector has remained controversial by many scholars. Therefore, fossil fuel financing affects the operations and activities of ESG in global banks (Bernardelli et al, 2022). Recently, previous literature has argued that ESG activities are related to financial losses during crises, such as COVID‐19, for ETFs (Folger‐Laronde et al, 2022).…”

Financial, spatial and systemic determinants of ESG scoring assigned to commercial banks

“…ESG assessments are also positively influenced by the extent of data provided for evaluation (Drempetic et al, 2020), and this is related to the scale of the business, which indirectly relates to H1. In turn, Bernardelli et al (2022) conclude that the share of exposures in a bank's portfolio to customers classified as operating in the fossil fuel sector, to coal mines or coal-fired power plants above a certain cut-off value increases the probability of classifying the bank in the group of institutions with higher ESG risk. Given the expected materialisation of the negative impact of exposures to the fossil fuel sector on bank performance (increasing credit risk), the relationship indicated by Bernardelli et al (2022) is consistent with H2.…”

“…The S component takes into account the quality of relationships, communication and respect for the rights belonging to the company's various stakeholder groups (including employees, the local community and contractors, among others). The G factor, on the other hand, refers to an assessment of the quality of a company's governance, including but not limited to the management of conflicts of interest, as well as anti-corruption procedures and practices (Bernardelli et al, 2022;Mathis, 2022). ESG scorings are a synthesis of a company's non-financial performance, reflecting the level of risk and quality of management of the aforementioned areas that are non-financial in nature.…”

Energy and Mineral Resources Exploitation in the Delignitization Era: The Case of Greek Peripheries

“…Furthermore, the energy transition will be expanding as long as environmental, social, and governance (ESG) factors are the investors' priorities [7].…”