The Determinants of ESG Rating in the Financial Industry: The Same Old Story or a Different Tale?

Abstract

Corporate social performance (CSP) and, in particular, environmental, social and governance (ESG) ratings became a focal point for scholars, practitioners and policy makers over the last decade. In order to better understand the dynamics underlying CSP within the financial industry, we investigate its determinants. Adding to the debate regarding CSP antecedents, we draw on a world-wide sample of 727 financial firms operating in twenty-two countries within the period 2006–2017 and look for firm, country and temporal factors that affect CSP. The main results of our empirical analyses provide evidence that financial firms’ ESG scores are growing on a linear trend over time, and such tendency is enhanced by their size and profitability, together with the economic and social development of the country within which they operate. Our findings also show that the environmental, social and governance pillars follow independent patterns.

The Effects of Legal Origin and Corporate Governance on Financial Firms’ Sustainability Performance

“…Our findings show that legal origin is an important determinant of ESG performance in financial firms. This result is consistent with previous findings [8,13], and highlights the relevant role that a country's legal origin plays in promoting sustainability policies and investments in the financial industry. In particular, we find that financial firms based in civil-law countries present higher ESG scores than those based in common-law countries, and that the difference is particularly significant for French-civil-law and German-civil-law countries.…”

“…Recent research has moved to ESG ratings obtained from specialized databases in order to measure corporate disclosure instead of using ratings and indexes calculated by individual researchers after hand-collecting data from annual reports [13]. Previous studies use commercial ESG ratings to examine the effect of firm-level and corporate governance variables on US banks' corporate social reporting around the financial crisis [19].…”

“…However, neither of these arguments can explain differences across firms and across countries in sustainability activism [12]. Previous studies that analyze the determinants of ESG activity in the financial industry obtain a large range of results [13], indicating that both sustainability reporting and sustainable practices widely differ across financial firms.…”

“…In addition, and according to the stakeholder theory, we assess corporate governance variables in depth, since previous studies show that well-governed financial firms are more prone to engage in ESG investments [13,[15][16][17]. In fact, we examine the joint effect of corporate governance and legal origin on sustainability performance, since governance structures are intimately related to the way societies shape the mechanisms to implement and control their economic life.…”

Does ESG Affect the Stability of Dividend Policies in Europe?

“…The initial sample was narrowed to account for the following issues: recent entry in the index, lack of data on dividends, no data to compute all control variables, and firms in the financial sector. Financial firms should be studied autonomously, as in Crespi and Migliavacca [45] because they are affected by dissimilar value drivers. The final sample represents 1914 firm-year observations.…”