Introducing ESG controversies as the polluting factor of banks’ activity: a nonparametric efficiency approach

Abstract

Purpose

Whether environmental, social and governance (ESG) factors are a curse or a blessing in the run for performance is still a burning issue. This is all the more true for banks, as their call for action in ESG dimensions clashes with evidence of scandals. As a more aligned to reality view, we propose to regard the mistreatment of ESG issues, both theoretically and empirically, as an undesirable output of banks' everyday activity. Empirically, we question whether 128 leading banks worldwide neglected the minimisation of ESG controversies (ESGC) in pursuing traditional productive efficiency, over the timespan 2011–2021.

Design/methodology/approach

To our end, we use oriented distance functions according to the nonparametric efficiency approach of data envelopment analysis (DEA). This framework accounts for undesirable outputs.

Findings

Being inefficient in the ESGC domain is not a necessary evil to achieve productive efficiency. Instead, incurring in higher ESGC negatively affects productive efficiency, by causing future decrease of reputation and performance.

Originality/value

We propose a new paradigm of banks’ activity and related efficiency evaluation. In so doing, we favour a real dimension of banks’ engagement in ESG concerns.