Does the environmental impact of banks affect their financial performance?

Abstract

We empirically study the environmental impact of banks, i.e., the negative externality on the environment and society deriving from the use of a natural resource or the emission of a pollutant. We find that environmental “impact ratios”, that is, environmental damage costs in proportion to total revenues are negatively correlated with bank profitability. Furthermore, banks with a stronger impact on the environment are valued less by equity market investors and pay less cash to shareholders. Among environmental categories, potential damage from greenhouse gas emissions or waste seems to be especially severe. We provide important insights for banks’ environmental management. If bankers can address businesses and practices to be more renewable and lower in their emissions, they could improve both the operating and the market performance. Thus, firms would be financially more stable and could react smoothly to the recent introduction of stricter and onerous environmental regulations.