2/2/23, 2:43 PM ESG controversies and governance: Evidence from the banking industry - ScienceDirect

Finance Research Letters

Available online 6 October 2022, 103397
In Press, Corrected Proof

ESG controversies and governance: Evidence from the banking

industry
Paolo Agnese a , Francesca Battaglia b, Francesco Busato c, Simone Taddeo d

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Abstract

This study empirically investigates the relationship between the Governance pillar of ESG
(Environmental, Social and Governance) dynamics and ESG Controversies. We include the three
sub-pillars of ESG Governance (ESG Management, ESG Shareholders, and ESG CSR Strategy).
Applying the generalized method of moments (GMM) system version of the Arellano-Bond
estimator, we analyse a panel dataset of 567 listed banks from United States and Europe, over the
period 2016–2021. The findings show a positive and statistically significant relationship between
ESG Governance and ESG Controversies scores. Furthermore, we find that these results are
confirmed by all three sub-pillars of ESG Governance.

Introduction

The growing attention of policy makers, practitioners, stakeholders, and academics to corporate
sustainability issues has contributed, in recent years, to the development and dissemination of
the Environmental, Social, and Governance (ESG) metrics. These are three dimensions

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2/2/23, 2:43 PM ESG controversies and governance: Evidence from the banking industry - ScienceDirect

(Environmental, Social, and Governance) that are not strictly economic-financial and are
increasingly taken into consideration in business management and financial investments. An
indicator that can be included in the scope of Corporate Social Responsibility (CSR) and which
integrates the ESG scores is the ESG Controversies, to provide a comprehensive evaluation of the
company's sustainability impact and conduct over time. The ESG Controversies score measures a
company's exposure to environmental, social and governance controversies and negative events
reflected in global media.

Some authors have recently addressed the role of ESG Controversies with reference to non-
financial companies. Li et al. (2019) analyze a sample of 2613 firms from 39 countries over the
period 2009–2013 and argue that, in the event of a controversy, firms will try to repair the
incremental damage to their legitimacy, reputation, and stakeholder relations by engaging in
symbolic CSR. On the other hand, Aouadi and Marsat (2018), using a unique dataset of more than
4000 firms from 58 countries for the 2002–2011 period, show that ESG Controversies are
associated with greater firm market value. As part of a similar line of research, DasGupta (2022)
analyzes an international dataset from 27 countries for the 2010–2019 period. The author argues
that firms with financial performance shortfall and with high levels of ESG Controversies would
tend to achieve high ESG performance. Marsat et al. (2022), instead, focus on environmental
controversies. Using an international dataset of 233 environmental controversies for the 2010–
2016 period, the authors show that environmental performance significantly increases firm
resilience when confronted with a shock caused by an environmental controversy.

With reference to financial institutions, the empirical literature often focuses on the relationship
between ESG dynamics and banking performance (e.g., Azmi et al. 2021; Bătae et al. 2021;
Chiaramonte et al. 2021; Neitzert and Petras 2022), while the topic of ESG Controversies in the
banking industry is still very little explored by academic research. Galletta and Mazzù (2022)
investigate how ESG Controversies affect bank risk taking, considering the risk-weighted assets
(RWA) and the Z-score. By analyzing a sample of 8430 observations from worldwide listed banks
for the 2011–2020 period, they find that banks with fewer ESG Controversies take less risk.

By analyzing a panel dataset of 567 banks from United States and Europe over the period 2016–
2021, our goal is to examine whether ESG Governance dynamics affect the ESG Controversies
score. In order to investigate which ESG Governance factors impact ESG Controversies, we
include in our analysis the three sub-pillars of ESG Governance (i.e., ESG Management, ESG
Shareholders, and ESG CSR Strategy), following the classification and subdivision developed by
the reference data provider (Refinitiv, 2022).

To the best of our knowledge, this is the first study that empirically investigates whether
governance sustainability, measured by the ESG Governance pillar and its three sub-pillars, is
capable of influencing bank controversies, measured by the ESG Controversies variable.

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2/2/23, 2:43 PM ESG controversies and governance: Evidence from the banking industry - ScienceDirect

Accordingly, our contribution aims to fill the gap left by prior literature by answering the
following research question: does the level of sustainability of banking governance have an
impact on controversies?

By applying the generalized method of moments (GMM) system version of the Arellano-Bond
estimator, we find a strong and positive correlation between ESG Governance performance and
the ESG Controversies score. Moreover, we show that these findings are reinforced by all three
sub-pillars of ESG Governance.

The remainder of the paper is structured as follows. Section 2 describes the study's data and the
methodology used. Section 3 presents the empirical results, while the final section concludes.

Section snippets

Data

The analysis focuses on listed banks headquartered in the U.S. and European countries, with data
available from Thomson Reuters’ Refinitiv on ESG data, including the ESG Controversies score
(our variable of interest). We consider the period 2016–2021 (the last data available). As a result,
the final sample consists of 433 listed U.S. and 134 European banks, with a total of 567 listed
financial institutions. The ESG data are all captured from the Thomson Reuters’ Refinitiv
Database (recognized…

Results

Table 2 accounts for the estimation outputs with reference to the impact of the ESG Governance
performance on the ESG Controversies score of U.S. and European listed banks analyzed. The
results found reveal significant and important indications. Above all, we find that improved
Governance performance plays an important role in the management of financial institutions’
controversies.

As the growing media attention to corporate controversies leads to an increase in stakeholders’

skepticism and…

Conclusions

In the context of ESG dynamics, in this paper we investigate a topic not yet explored by prior
literature, namely the relationship between the ESG Governance pillar (including its sub-pillars
ESG Management, ESG Shareholders, and ESG CSR Strategy) and the ESG Controversies score.

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2/2/23, 2:43 PM ESG controversies and governance: Evidence from the banking industry - ScienceDirect

Our research question is therefore the following: does the sustainability of banking governance
have an impact on company controversies?

The empirical analysis includes a large sample of financial institutions: 567…

Authors’ statement

The authors state that this paper is not published or under consideration elsewhere.…

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal
relationships that could have appeared to influence the work reported in this paper.…

References (18)

S. Marsat et al.
Does environmental performance help firms to be more resilient against environmental
controversies? International evidence
Finance Res. Lett. (2022)

J. Li et al.
Corporate controversy, social responsibility and market performance: international
evidence
J. Int. Financ. Mark. Inst. Money (2019)

M. Köhler
Which banks are more risky? The impact of business models on bank stability
J. Financ. Stab. (2015)

R. DasGupta
Financial performance shortfall, ESG controversies, and ESG performance: evidence from
firms around the world
Finance Res. Lett. (2022)

R. Blundell et al.
Initial conditions and moment restrictions in dynamic panel data models
J. Econom. (1998)

O.M. Bătae et al.

The relationship between environmental, social, and financial performance in the banking
sector: a European study
J. Clean. Prod. (2021)

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2/2/23, 2:43 PM ESG controversies and governance: Evidence from the banking industry - ScienceDirect

W. Azmi et al.
ESG activities and banking performance: international evidence from emerging
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J. Int. Financ. Mark. Inst. Money (2021)

M. Arellano et al.
Another look at the instrumental variable estimation of error-components models
J. Econom. (1995)

A. Aouadi et al.
Do ESG controversies matter for firm value? Evidence from international data
J. Bus. Ethics (2018)
There are more references available in the full text version of this article.

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