Environmental, social, governance performance, and bank cost of financing

Abstract

Today more and more companies are shifting their focus from pure profit maximization to achieving a balanced bottom line, i.e. environmental, societal and economic targets. Environmental, Social and Governance has become a board-level issue for many companies. These companies aim to serve multiple stakeholders, customers, shareholders, business partners, nature, and society in general. In line with this, there emerged numerous studies in this area, mostly measuring the association between ESG and financial performance. In this thesis, I investigate the association between cost of capital and ESG performance for banks listed around the world. Results show that there are not mostly statistically significant relationships between cost of capital and environmental, social and governance scores of the banks. The initial OLS regression provided a weak negative association between Governance performance and both cost of equity and cost of deposits while a positive relationship between ENV performance and cost of equity and cost of deposit. In order to check for robustness, I have conducted IV regression with average country ESG scores as instrumental variable for cost of equity financing and cost of deposit regressions. As a result of IV regression, I found positive relationship between each pillar and cost of deposit while positive relationship between cost of equity and ENV pillar score but no relationship at all between the remaining three scores and cost of equity. Panel regression with fixed effects analysis indicated a lack of meaningful association between cost of equity and cost of deposit against ESG variables.