Impact of ESG practices on European Bank Lending for Sustainability: The Role of Culture and Institutions

Abstract

This study investigates the impact of Environmental, Social and Governance (ESG) practices on bank lending in the European Union banking sector, using a sample of 53 banks from 19 European Union countries for the period 2004–2018. Our findings show that ESG activities play a significant role in increasing bank lending. Interestingly, the ESG pillars follow a different pattern. Environmental and governance-friendly activities impact bank lending more than social. Moreover, the national culture and institutional quality significantly affect the ESG activity and bank lending nexus. Our outcomes demonstrate that national cultural dimensions significantly impact bank lending and mediate the relationship between ESG activity and bank lending. In comparison, good quality institutional supports banks in increasing their lending capacity and enhancing the ESG practice's constructive impact. The empirical findings are quite robust to using the various ESG dimensions, alternative estimation techniques, and control for the regulatory environment and macroeconomic conditions. JEL Classification: G20, G21