ESG and reputation: The case of sanctioned Italian banks

Abstract

The aim of this paper is to investigate whether banks adopt Environmental, Social, and Governance (ESG) practices to reduce reputational damage due to financial penalties and whether the adoption of ESG factors can reduce the probability to receive sanctions. This study extends a previous research (Guerello et al., North American Journal of Economics and Finance, 2018, 48, 591–612) by including ESG scores as determinant of the probability to be sanctioned. The econometric analyses in this paper are based on a sample of 13 Italian banks for the years 2008–2018 and includes ESG scores provided by both Thomson Reuters and Bloomberg. The research shows that ESG score and the probability of sanctions are positively related. However, a careful analysis of causal directions clarifies the meaning of such positive relationship: receiving financial penalties is detrimental for banks reputations, therefore it's necessary for banks to improve their reputation through the adoption of ESG practices.

Board diversity and corporate social performance: Does the family firm status matter?

“…Some considerations could be made also in relation to the variables used in the study. As regards the dependent variable, proxied with social pillar from ASSET4 database, future research could thus consider using (and comparing) different measures of CSP beyond ASSET4 social performance score, owing to the divergence among most important rating agencies (Murè et al, 2021) and could also analyze the impact on the CSR sub‐score (Beji et al, 2020; Block & Wagner, 2014).…”

The Relationship between ESG Scores and Firm-Specific Risk of Eurozone Banks

“…Similarly, another research study show that the corporate social performance has a negative relationship with the idiosyncratic volatility for firms with better communication with their stakeholders [18]. An increased attention of the stakeholders in the ESG performances of banks is evident, and the adoption of ESG practices has been shown to secure the reputation of banks by minimizing the possibility of sanctions [36]. ESG could be a risk-mitigation tool, especially during periods of financial distress by signaling prudent banking activities, enhancing reputation, and ensuring good relations with the community [29].…”

The application of corporate social responsibility (CSR) actions for mitigation of environmental, social, corporate governance (ESG) and reputational risk in integrated reports

“…Graafland, 2018), and CSR initiatives can help to mitigate reputational risk (Coombs & Holladay, 2015). Murè et al (2020) clarified that receiving penalties is detrimental for reputation, therefore it's necessary to improve it through the adoption of ESG practices. While, Di Tommaso and Thornton (2020) concluded that there is a trade‐off between reducing risk‐taking and company's value.…”

“…Muñoz‐Torres et al (2018), based on the criteria that are used by ESG rating agencies to evaluate corporate sustainability performance, indicated that prevention of corruption and bribery, and transparency are the most relevant in the governmental domain. Murè et al (2020) noticed that financial penalties increase board's member expertise, and particularly banks will have to set up governance systems, adequate internal controls, as well as to develop appropriate long‐term analyzes within their business's strategies. In this perspective, ESG factors should be involved in the compliance processes in order to modify companies' strategies with the aim to guarantee long‐term value creation.…”