ESG uncertainties and valuation implications: Evidence from the EU banking sector

Abstract

This study investigates the impact of financed emissions and ESG controversies on the valuation of banking firms within the European Union. As climate-related risks become increasingly critical to financial markets, banks face pressures to manage their contributions to climate change and adhere to evolving Environmental, Social, and Governance (ESG) standards. Using panel data between 2018 and 2021 of banks across twenty-seven countries, we assess the influence of financed emissions and ESG controversy scores on two key valuation metrics of residual income and price-to-book ratios. Our findings reveal that banks with lower ESG controversies tend to achieve higher market valuations. Regarding climate change, the banks with higher financed emissions face declining valuations. Our results highlight banks' strategic importance in minimizing their carbon footprint and mitigating ESG-related risks to safeguard long-term value. The research has significant actionable implications. We contribute to the ongoing dialogue on sustainable finance, offering insights for banks, regulators, and investors seeking to navigate the challenges of a transitioning financial sector.