The Impact of ESG Controversies on Bank Value and Risk-taking

ESG performance is one of the most important non-financial factors investors pay attention to when valuing a bank. Previous studies, devoted to bank ESG performance, rely solely on ESG ratings. The contribution of this paper to the existing literature is investigation of a new measure of ESG performance – ESG controversies. ESG controversies are covered in the media negative news that reflect a bank failure in ESG performance. The goal of this paper is to investigate the influence of negative ESG news on market value and stability of companies in a banking sector.A cross-country sample of 134 banks and data on 1,200 controversies from 2016 to 2020 are used in this study. Our results provide evidence that ESG controversies negatively affect bank value and have no impact on its stability. However, the effect on share prices is not unified: it is stronger for banks that are in the scope of investor attention, and this relation is observed for developed markets with high freedom of press exclusively. Moreover, investors take into consideration the reason of ESG controversy occurrence. They react strongly to negative ESG news, related to community and workforce.