Economic Computation and Economic Cybernetics Studies and Research, Issue 4/2022; Vol. 56
_________________________________________________________________________________
71
Senior Lecturer Voicu Dan DRAGOMIR, PhD
E-mail: voicu.dragomir@cig.ase.ro
Department of Accounting and Audit
The Bucharest University of Economic Studies
Postdoctoral Researcher Oana Marina BĂTAE, PhD
E-mail: oana.marinabatae@gmail.com
Department of Accounting and Audit
The Bucharest University of Economic Studies
Professor Bogdan Ștefan IONESCU, PhD
E-mail: bogdan.ionescu@cig.ase.ro
Department of Management Information Systems
The Bucharest University of Economic Studies
Professor Liliana IONESCU-FELEAGĂ, PhD
E-mail: liliana.feleaga@cig.ase.ro
Department of Accounting and Audit
The Bucharest University of Economic Studies
THE INFLUENCE OF ESG FACTORS ON FINANCIAL
PERFORMANCE IN THE BANKING SECTOR DURING THE
COVID-19 PANDEMIC
Abstract. Environmental performance, social responsibility, and corporate
governance quality are aspects of ESG performance. This study examines the
influence of ESG performance on the financial performance of 333 banks located
in 53 countries in Europe, America, and Asia, before and during the Covid-19
pandemic (2019-2021). Our model design allows us to establish causality
relationships. The main factors and financial data are collected from the Refinitiv
database. The findings indicate that the bank environmental performance in 2019
has a negative influence on the return on equity during 2020, and that no other
ESG factors are significant. Social responsibility expenditures and initiatives in
2020 positively influenced bank profitability in 2021. Furthermore, East Asian
banks have higher stock market returns and earnings per share determined by the
quality of corporate governance in the previous year. The environmental
performance of 2020 has a negative influence on earnings per share in 2021, but
only for the sample in East Asia. Implications for the banking sector and investors
are proposed.
Keywords: Banking sector, ESG performance, environmental performance,
social responsibility, corporate governance quality, corporate financial
performance, causality.
JEL Classification: F64, G21, G30, M14, O16, O51, O52, O53
DOI: 10.24818/18423264/56.4.22.05
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
72
1. Introduction
Banks have a special role in society, financially and socially. They assist in
creating new capital in a country, supporting the growth process (Levanti et al.,
2021). Although the banking sector is one of the most regulated economic sectors,
there are major differences between the various banking institutions, both in terms
of financial performance and in other areas such as social responsibility,
environmental impact and performance, or corporate governance quality.
This paper aims to identify the influence of the three ESG pillars
(environmental, social, governance) on the financial performance of banks, using a
large sample of banks located in Europe, the Americas and Asia, for the period
2019-2021. Two accounting performance indicators and two market performance
indicators were selected as dependent variables so that we can take a complex look
at the notion of financial performance. The main factors are collected from the
Refinitiv database and measure the environmental performance, social
responsibility, and corporate governance quality of the sample banks. The research
design implies causality relationships, because the factors have a one-year lag from
the dependent variables. The link between ESG performance and corporate
financial performance has been thoroughly explored for banks (Uddin Ahmed et
al., 2018; Bătae et al., 2020; Bătae et al., 2021; Buallay, 2019; Esteban-Sanchez et
al., 2017; Gangi et al., 2018; Nițescu & Cristea, 2020) and in a broader economic
context. However, previous scientific results were mixed and inconclusive, mainly
due to the use of non-uniform calculation methodologies and indicators that were
not adapted to this sector or to uncontrolled factors such as the pandemic crisis.
Our contribution focuses on the influence of ESG factors on the financial
performance of 333 banks located in Europe, America, Asia, before and during the
Covid-19 pandemic (2019-2021). Our research process was to review articles
related to financial performance and ESG performance within the banking industry;
propose hypotheses based on the most recent literature; establish dependent
variables used to measure financial performance, and independent variables
(predictors) that measure ESG; analyze the data using several regression models
with control variables; discuss the causality relationships between the ESG pillars
and financial performance; highlight the significance of the results and establish
future directions, mentioning the limitations of the research.
2. Literature review and hypotheses
2.1. Environmental performance in the banking sector
Environmental performance refers to business impacts in both monetary
and non-monetary terms (Dragomir, 2018). Although banks are one of the most
environmentally friendly sectors (Jo et al., 2015), they have started to face pressure
to change their business approach to meet the growing demands of stakeholders
that place considerable value on environmental protection and conservation. Green
financial products and services, such as climate products, environmental advisory
services, and different socially responsible savings instruments, represent signs that
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
73
a bank is committed to environmental protection (Bătae et al., 2021). Uddin
Ahmed et al. (2018) mention that the most common environmental criteria
considered by banks when granting loans to their customers are location
vulnerability and waste management, while more complicated environmental
issues are usually ignored.
In the literature, there are numerous measures of environmental disclosure
and performance (Dragomir, 2013), such as the environmental pillar score from
Refinitiv Eikon or Bloomberg. Most of the previous studies in the banking
literature show a positive and significant relationship between environmental
performance and corporate financial performance. Shakil et al. (2019) report a
positive association between environmental performance and bank financial
performance in emerging countries. Furthermore, financing different
environmental projects could become a factor of improved business performance in
the banking sector (Nizam et al., 2019). In a study conducted on banks in 29
countries during the period 2002-2011, Jo et al. (2015) showed that lower
environmental costs can enhance financial performance in a significant and
positive way, more so in Europe and North America compared to the Asia Pacific
region. They also find that a decrease in environmental costs is expected to take at
least one or two years before results can be observed in operational efficiency
measures, such as return on assets. When analyzing the performance of 108
European banks in the financial year 2018, Bătae et al. (2020) found that there
were no significant differences in the environmental pillar score for developed
versus emerging Europe.
Buallay (2019) finds that environmental disclosure is positively associated
with return on equity and Tobin’s ratio, which means that information on
environmental issues increases bank financial and market profitability. On the one
hand, increased profitability is well-regarded by stakeholders that consider
environmental proactivity as a component of their investment decisions. Scholtens
(2009) found that most banks perform environmental risk analysis as part of their
lending policies; however, only one third of banks in his study offer products or
services that focus on energy efficiency or carbon dioxide emission.
Environmental innovation is a component of the environmental pillar that
is relevant to banks. Jo et al. (2015) mention that investments in corporate
environmental responsibility, such as environmental innovation technology, can
minimize both direct and indirect environmental costs of banks. In conclusion,
banks can indirectly affect the natural environment through their decisions on
project financing (Dragomir et al., 2022). Bătae et al. (2021) reported a positive
relationship between emission reductions and financial performance when
analyzing 39 European banks for the period 2010-2019. Therefore, stakeholder
theory and the resource-based view were validated as banks turn their attention to
resource efficiency, process digitization, and environmentally aware products.
Based on the previous literature on the banking sector, we observe that the
results are inconclusive and are relevant only to the environmental performance
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
74
prior to the Covid-19 crisis. Thus, this research focuses on changes that occurred
during pre-pandemic and pandemic periods, at the level of each of the three pillars
of ESG. Therefore, our first hypothesis is as follows.
H1: Current-year financial performance in the banking sector is influenced
by the environmental performance in the previous year.
2.2. Social responsibility in the banking sector
Corporate social responsibility (CSR) refers to how banks treat their
employees, customers (Badea et al., 2021), and communities (Miralles-Quirós et
al., 2019). In the literature, there are different measures of operationalizing CSR
performance, such as the social pillar score from Refinitiv Eikon or Bloomberg.
Some studies focus on CSR at the aggregate level, an example being the study by
Wu and Shen (2013), which discusses banks’ motivations to engage in CSR.
Strategic choices based on product differentiation are expected to reduce
competition intensity and increase community approval. Banks work directly with
people and communities for whom CSR actions are immediately visible and
beneficial.
There are studies in the literature that show a positive and significant
relationship between CSR and financial performance in the banking sector. The
largest banks are the ones that pursue socially responsible activities to a significant
degree compared to the small ones. According to Shen et al. (2016), socially
responsible banks have a significant higher corporate financial performance
compared to non-CSR focused banks. A positive correlation between social and
corporate financial performance was reported in the case of Italian banks that
succeeded in investing and controlling costs without ethical tradeoffs (Soana,
2011).
From the perspective of stakeholder theory, social performance should
positively impact the corporate financial performance of banks (Gangi et al., 2018).
On the contrary, according to agency theory, CSR should be negatively related to
corporate financial performance because shareholders are deprived of funds
redirected toward social goals. Indeed, the relevant literature reports several
negative correlations between social performance and financial performance.
Banks are forced to spend resources towards social performance, and they should
not expect short-term benefits from these activities. Relevant results were obtained
by Bătae et al. (2021) regarding European banks for which the prediction of
stakeholder theory on the positive relationship between CSR and financial
performance was rejected.
Most studies have focused on CSR at the aggregated level within the
banking sector, while some contributions analyze various dimensions such as
community, relations with employees, human rights (workforce), and product
responsibility. Relationships with employees are presented as a measure of
commitment and effectiveness in generating loyalty and trust within the bank’s
workforce (Esteban-Sanchez et al., 2017). Most studies found a positive influence
of employee relations on corporate financial performance (Matei et al., 2021),
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
75
showing that good employee policies (e.g., health and safety, diversity, equal
opportunities, employment quality) can generate competitive advantages, decrease
staff rotation, increase efficiency, and reduce absenteeism. Gangi et al. (2018)
found that motivation and retention of qualified employees represent an additional
driver of competitiveness with respect to CSR. Outstanding CSR activities will
make the bank look attractive to young candidates and improve its reputation (Jo et
al., 2015; Tachiciu et al., 2020).
Previous studies are inconclusive and the relationships between bank
financial performance and social responsibility may be negative or positive at the
aggregated level. Furthermore, the uncertainty generated by the pandemic crisis has
been a burden on the welfare of employees, customers, and communities. In this
context, we consider the following hypothesis:
H2: Current-year financial performance in the banking sector is influenced
by the social responsibility initiatives recorded in the previous year.
2.3. Corporate governance quality in the banking sector
Corporate governance represents an important consideration for banks,
guaranteeing transparency, compliance, and accountability (Miralles-Quirós et al.,
2019). Bank executives and board members are expected to act in the best interest
of bank investors. In this sense, corporate governance describes systems, processes,
structures, board composition, and board functions, including the remuneration
policy and performance criteria for the chief executive officer (CEO) and board
members (Esteban-Sanchez et al., 2017).
In the literature, corporate governance quality can be measured on a
corporate governance index such as the corporate governance pillar scores from
Refinitiv Eikon or Bloomberg. In a study by Esteban-Sanchez et al. (2017) over the
period 2005-2010, the results show that good corporate governance has a positive
effect on financial performance. However, there are studies that reveal a negative
relationship between corporate governance quality and bank financial performance.
Soana (2011) concluded that governance quality has a negative relationship with
return on average equity and return on average assets. Bătae et al. (2021) found that
there is a negative association between corporate governance quality and
accounting performance and market valuation for European banks analyzed during
2010-2019, providing evidence against agency theory.
In some emerging markets, the effect of corporate governance on bank
performance is not present (Shakil et al., 2019). One reason might be the lack of
public pressure coming from different regulatory bodies such as the central bank,
security commission, and other public agencies or non-governmental organizations.
However, in a study performed on banks from the United States and Europe, for a
specific event represented by either an acquisition or a merger, Hagendorff et al.
(2010) found that board independence and diversity improve the acquisition
performance only if there are strict banking regimes.
Banking regimes refer to different situations in which the regulators have
the authority to directly influence the type of activities that banks can engage in.
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
76
This involves increasing the level of regulatory capital to meet the legislative
requirements; enforcing reversals of high-risk policies and veto takeover proposals;
imposing a specific level of the minimum mandatory reserve of credit institutions;
and requiring new board elections to be held within the banks. If there is a less
strict regulatory regime, corporate governance is virtually irrelevant in improving
bank financial performance. There is no consensus within the literature on the
positive or negative impact of corporate governance quality on financial
performance. The uncertainty generated by the pandemic crisis affected most
industries, and banks were required in many countries to accept moratoria as a
relief measure. Therefore, we propose the following hypothesis:
H3: Current-year financial performance in the banking sector is influenced
by the corporate governance quality measured for the previous year.
2.4. The combined ESG score as a factor of financial performance
In a study on 108 European banks for 2018, Bătae et al. (2020) found that
there are no significant differences between developed and emerging Europe, in
terms of the combined ESG score. The authors found similar results when
comparing Eurozone versus non-Euro countries, while banks in southern European
countries have a significantly higher combined ESG score compared to those
located in western, northern, central, and eastern Europe. As there is a growing
interest in ESG, banks need to be committed to supporting cleaner production
efforts in non-banking industries (Bătae et al., 2021). Moreover, banks are an
important contributor to the financial stability of the global economy. Thus, they
also need to encourage their customers to transition to a cleaner business model.
Previous literature on the banking sector shows that there is evidence of the
relationship between the combined ESG score and financial performance; however,
the results were inconclusive and referred only to the pre-pandemic period. Thus,
this research focuses on changes that occurred during the pre-pandemic and
pandemic period, with respect to the combined ESG score that considers the three
pillars. Therefore, our hypothesis is as follows:
H4: Current-year financial performance in the banking sector is influenced
by the combined ESG score of the previous year.
3. Methods
Our study fills a knowledge gap in the literature by analyzing the influence
of ESG performance on financial performance for banks located in three different
continents. The population is represented by banks with headquarters in countries
in Europe, Asia, and the Americas. This study is constructed from data collected
from Refinitiv, except for a control variable collected from World Bank statistics.
The comprehensive list was compiled as follows: from the Refinitiv
database, 1920 banks were included for the selected geographic regions. The
selection criterion was the availability of environmental, social and governance
(ESG) scores for 2019 and 2020, as well as financial information for 2019 – 2021.
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
77
The ESG scores for 2021 were not available at the time of completing the present
research. For all banks in the sample, the closing date is December 31st
.
The final sample included 333 banks with a complete dataset, from 53
countries. Three regions were considered homogeneous in terms of macroeconomic
and cultural characteristics: Europe (23 countries – 90 banks), the USA and Canada
(91 banks), and East Asia (4 countries – 61 banks). The data for these regions were
included in separate group analysis for robustness tests. The Refinitiv database was
used in previous studies focused on the banking sector (Bătae et al., 2021; EstebanSanchez
et al., 2017; Gangi et al., 2018; Shakil et al., 2019).
The ESG and financial data for 2019 reflect the pre-pandemic period. ESG
scores for 2020 are influenced by management decisions taken by companies at the
start of the Covid-19 pandemic and during the turbulent first year of the pandemic.
The financial data for 2020 and 2021 indicate the performance of the sample banks
during the pandemic period. Therefore, the data for each year in the sample have a
different significance and will be discussed in these terms: pre-pandemic (2019)
versus the first pandemic year (2020) versus during the pandemic (2021). The
model design allows us to establish causality relationships. The variables used in
this research are presented in Table 1. The explanations are in accordance with
definitions provided by the European Banking Authority (EBA) for bank-specific
indicators, within the EBA methodological guide. The current study uses a subset
of the variables proposed by Bătae et al. (2021). The components of the ESG
scores and the gross domestic product (GDP) are in line with the information
provided on the official websites of Refinitiv and the World Bank for the
respective years.
Table 1. Variables for the present study
Variable (abbreviation) Description
Return on assets (ROA) Dependent variable: The profitability of total assets. It is
computed as net income after taxes divided by total
assets.
Return on equity (ROE) Dependent variable: The profitability of the invested
equity at book value. It is calculated as net income after
taxes divided by total equity.
Stock market returns (SMR) Dependent variable: The change in the stock price over
the analyzed period. It is computed as the (closing price
at the end of t1 minus the closing price at the end of t0)
divided by the closing price at the end of t0.
Earnings per share (EPS) Dependent variable: A widely used metric for estimating
corporate value. It is calculated as a company’s net profit
divided by the number of common shares outstanding.
ESG Combined from
Refinitiv (ESGC)
Main predictor: The weighted average of the ESG scores
and ESG controversies that provides a comprehensive
evaluation of the sustainability impact and corporate
conduct.
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
78
Variable (abbreviation) Description
Environmental score (E) Main predictor: The relative sum of category weights for
the environmental categories, such as resource use,
emissions and waste reduction, and environmental
innovation.
Social score (S) Main predictor: The relative sum of category weights for
the social responsibility categories, such as workforce,
human rights, community involvement, and product
responsibility.
Corporate governance
quality (G)
Main predictor: The relative sum of category weights for
the governance categories, such as management quality,
shareholder rights, and social responsibility strategy.
Bank size (TA) Control variable: The natural logarithm of total assets.
Leverage (LEV) Control variable: The multiple of liabilities to equity as
an indication of a bank’s leverage. It is computed as total
liabilities divided by total equity.
Loans to total deposits (LD) Control variable: A bank-specific indicator that shows
the proportion of loans that are funded by deposits. It is
computed as net loans divided by total deposits.
Customer deposits to total
liabilities (CDL)
Control variable: A bank-specific indicator that shows
the relevance of customer deposits in the funding mix,
measured as customer deposits divided by total
liabilities.
GDP per capita (GDPC) Control variable: A country-specific indicator that is
calculated as the (sum of gross value added by all
resident producers in the economy plus any product
taxes and minus any subsidies) divided by mid-year
population.
This study considers ROA and ROE as accounting-based indicators of
financial performance (FP), while SMR and EPS are market-based indicators.
Based on previous research, it would be reasonable to use both market data and
company profitability as performance indicators. Furthermore, the prior-year FP is
expected to be the most significant predictor of the current-year FP. To identify the
influence of ESG factors on future FP, before and during the pandemic crisis
(2019-2021), the proposed econometric models are listed below.
Equation (1) uses the separate environmental, social and governance scores
in 2019 as factors of financial performance for the year 2020:
= + + + + +
Equation (2) uses the 2019 ESG combined score (pre-pandemic) as a factor
of financial performance for the year 2020 (first pandemic year):
= + + +
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
79
Equation (3) uses the separate environmental, social and governance scores
in 2020 as factors of financial performance for the year 2021:
= + + + + +
Equation (4) uses the 2020 ESG combined score as a factor of financial
performance for the year 2021 (during the pandemic):
= + + +
Equation (5) is a particularization of equation (3) on each region i (Europe,
the USA and Canada, and East Asia):
; = + ; + ; + ; + ;
+ ;
Multiple regression was estimated in the R (version 4.1.3) statistical
environment. All variables were standardized as z-scores. Therefore, the beta
coefficients of all regression estimations are standardized and directly comparable.
Variables that had outliers were Winsorized by replacing low or high extreme
values with the 5th
or 95th
percentile, respectively. Regression results were checked
for multicollinearity (variance inflation factors should be less than 5), linearity (on
the residuals versus fitted values plot), and homoscedasticity (on the scale-location
plot). Additionally, the residual versus leverage plot was used to identify influential
values that would alter the results of the regression analysis. For each model
estimation, up to five influential values (less than 1.5% of the total sample) were
removed, based on Cook’s distance. Considering these tests and data corrections,
the results presented below are considered sufficiently robust.
4. Results
The descriptive statistics in Table 2 are calculated on the raw
(untransformed) data for the main dependent variables and factors. Sample banks
have a wide range of scores for all ESG pillar scores and the combined score. The
most restricted range is for the social pillar, but it is more than 50% of the
theoretical range (0-100). This ensures that the factors have sufficient variability
but no outliers. In addition, ESG scores are significantly correlated (see Table 3),
but the correlations are not extremely high (above 0.80). Among the dependent
variables, ROA and ROE are highly correlated, but the other indicators have more
modest correlations (below .40). This indicates that financial performance ratios
measure different aspects of bank performance.
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
80
Table 2. Descriptive statistics for the dependent variables and
main predictors
Variables M SD Min Max Skew. Kurt.
ESGC2019-20 52.61 15.78 11.37 86.61 -0.0953 -0.591
E2019-20 42.51 29.44 16.10 96.62 0.1190 -1.258
S2019-20 57.84 21.06 44.90 96.49 -0.2190 -0.774
G2019-20 57.88 18.98 13.69 93.63 -0.2680 -0.705
ROA2019-21 0.0083 0.0063 -0.0235 0.0330 -0.1170 3.487
ROE2019-21 0.0836 0.0578 -0.2660 0.2540 -1.8200 7.897
SMR2019-21 0.0787 0.1510 -0.5310 0.6120 -0.0799 1.916
EPS2019-21 1.5840 2.3060 -1.6490 21.0100 3.1800 16.880
Notes. The statistical measures were calculated on the company averages over the analyzed
period (N = 333).
Table 3. The correlation matrix for the dependent variables and
main predictors
Variables ESGC E S G ROA ROE SMR EPS
ESGC2019-20 E2019-20
.68** S2019-20
.83** .77** G2019-20
.65** .35** .41** ROA2019-21
.06 -.13 -.04 .01 ROE2019-21
.11 .02 .04 .01 .85** SMR2019-21
-.05 -.07 -.04 -.01 .22** .26** EPS2019-21
.01 -.05 .01 .10 .15** .22** .32** Notes.
Pearson correlations were calculated between bank averages over the analyzed
period (N = 333).
During the pre-pandemic period, the environmental score for 2019
negatively influenced ROE for 2020 (see Table 4). The social responsibility score
and corporate governance quality for 2019 had no significant effect on any of the
dependent variables for 2020. The positive effect of ROA from the previous year
was stronger than the effect of LEV on ROA in 2020, while LD and CDL in 2019
negatively influenced ROA and ROE for 2020. Also, the positive effect of SMR in
2019 was stronger than the effect of bank size on SMR in 2020. EPS in 2020 was
negatively influenced by bank size and LD for 2019. Therefore, H2 and H3 are not
supported by the results, meaning that financial performance in the first pandemic
year was not influenced by pre-pandemic social responsibility initiatives and
corporate governance quality. Considering that ROE in 2020 was negatively
influenced by pre-pandemic environmental performance, H1 is supported for the
model specification of Equation (1).
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
81
Table 4. Regression estimates of Equation (1)
Dependent variables
ROA2020 ROE2020 SMR2020 EPS2020
Factors Std. β (SD) Std. β (SD) Std. β (SD) Std. β (SD)
Intercept 0.0125
(0.0261)
0.0310
(0.0252)
-0.0001
(0.0516)
0.0127
(0.0144)
ROA2019 0.7195**
(0.0472)
ROE2019 0.7066**
(0.0396)
SMR2019 0.1797**
(0.0668)
EPS2019 0.7843**
(0.0199)
E2019 -0.0516
(0.0406)
-0.0978*
(0.0393)
-0.0330
(0.0799)
-0.0041
(0.0224)
S2019 -0.0206
(0.0376)
0.0149
(0.0365)
-0.1083
(0.0740)
0.0016
(0.0209)
G2019 0.0083
(0.0253)
-0.0028
(0.0244)
-0.0341
(0.0503)
-0.0160
(0.0140)
TA2019 -0.0651
(0.0360)
-0.0509
(0.0344)
0.1480*
(0.0709)
-0.0600**
(0.0198)
LEV2019 0.1148**
(0.0435)
0.0829*
(0.0340)
0.0574
(0.0682)
0.0331
(0.0186)
LD2019 -0.5132*
(0.2169)
-0.4974*
(0.2086)
0.3454
0.4322
-0.3048*
(0.1202)
CDL2019 -0.1025*
(0.0398)
-0.0905*
(0.0382)
-0.0361
(0.0780)
-0.0335
(0.0219)
GDPC2019 0.0031
(0.0277)
0.0029
(0.0266)
0.0634
(0.0562)
0.0294
(0.0179)
N (df) 331 (321) 328 (318) 331 (321) 329 (319)
F 42.11** 39.11** 2.742** 255.2**
Adj. R2
.5286 .5120 .0453 .8746
Notes. * p < .05; ** p < .01. All coefficient estimates (β) are standardized.
Considering the econometric model presented in Equation (2), the
combined ESG of pre-pandemic year 2019 score was a non-significant factor of
financial performance in 2020 and H4 is not supported. ROA in 2020 was
negatively influenced by bank size (β = -.0946, p = .0057), LD (β = -.5393, p =
.0144) and CDL (β = -.0859, p = .0284) for 2019, and positively influenced by
ROA (β = .7164, p < .0001) and LEV (β = 0.1121, p = .0099) for 2019. Among the
control variables, bank size and LD for 2019 had a significant negative effect on
ROE (β = -.0883, p = .0072, respectively β = -.5136, p = .0162) and EPS (β = .0676,
p = .0003, respectively β = -.3110, p = .0106) in 2020. Also, SMR2019 had a
positive effect on SMR2020 (β = 0.1821, p = .0066).
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
82
During the pandemic, the social responsibility score for 2020 positively
influenced ROA, ROE, and EPS in 2021 (see Table 5). The environmental score
and corporate governance quality for 2020 did not have a significant effect on any
of the dependent variables for 2021. Among the control variables, the results show
that LEV in 2020 had a significant negative effect on ROA in 2021. Therefore, H2
is confirmed by the results, which means that financial performance during the
pandemic is positively influenced by the social responsibility initiatives in the first
year of the pandemic. H1 and H3 are not confirmed by the results. This shows that
the negative relationship between current-year financial performance and
environmental performance in the previous year is not a robust result.
Table 5. Regression estimates of Equation (3)
Dependent variables
ROA2021 ROE2021 SMR2021 EPS2021
Factors Std. β (SD) Std. β (SD) Std. β (SD) Std. β (SD)
Intercept -0.02291
(0.0245)
-0.0197
(0.0254)
0.0116
(0.0439)
-0.0400**
(0.01349)
ROA2020 0.5841**
(0.0409)
ROE2020 0.6546**
(0.0396)
SMR2020 -0.0758
(0.0468)
EPS2020 0.9731**
(0.0213)
E2020 -0.0351
(0.0367)
0.0197
(0.0381)
0.0947
(0.0657)
-0.0280
(0.0201)
S2020 0.0945**
(0.0332)
0.1007**
(0.0345)
0.0882
(0.0595)
0.0587**
(0.0182)
G2020 -0.0005
(0.0238)
-0.0134
(0.0245)
0.0120
(0.0427)
-0.0064
(0.0131)
TA2020 -0.0105
(0.0323)
-0.0233
(0.0331)
0.0112
(0.0584)
0.0541
(0.0177)
LEV2020 -0.2942**
(0.0351)
-0.0214
(0.0330)
-0.0041
(0.0563)
-0.0251
(0.0172)
LD2020 0.1051
(0.2134)
0.0992
(0.2197)
0.5490
(0.3819)
0.07440
(0.1178)
CDL2020 -0.0132
(0.0364)
0.0105
(0.0375)
0.2629**
(0.0643)
0.0205
(0.0199)
GDPC2020 0.0165
(0.0260)
0.0477
(0.0267)
0.3897**
(0.0467)
0.0969
(0.0167)
N (df) 331 (321) 328 (318) 331 (321) 329 (319)
F 69.48** 34.99** 12.06** 372.6**
Adj. R2
.6513 .4833 .2318 .9107
Notes. * p < .05; ** p < .01. All coefficient estimates (β) are standardized.
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
83
During the pandemic, the results show that the combined ESG score for
2020 positively influenced ROE and SMR for 2021 (see Table 6). Both measures
of financial performance indicate how equity financing is transformed into profits.
Investors believe that the combined ESG score is a good indication of a bank’s
ability to use equity funding and other equity to create profits. The combined ESG
score is a fast and comprehensive measure of company performance throughout the
year, on an intuitive scale of 0-100, normalized by industry. Our results show that
it also has predictive value in relation to financial performance. In relation to the
control variables, ROA in 2021 was positively influenced by ROA in 2020 and
negatively influenced by LEV in the same year. ROE in 2020 had a positive
influence on ROE in 2021. The results show that H4 is confirmed, which means that
the combined ESG score for the first pandemic year positively influenced the
financial performance of sample banks in the second pandemic year (2021).
Table 6. Regression estimates of Equation (4)
Dependent variables
ROA2021 ROE2021 SMR2021 EPS2021
Factors Std. β (SD) Std. β (SD) Std. β (SD) Std. β (SD)
Intercept -0.0235
(0.0246)
-0.0198
(0.0257)
0.0073
(0.0440)
-0.0393**
(0.0136)
ROA2020 0.5768**
(0.0412)
ROE2020 0.6407**
(0.0402)
SMR2020 -0.0883
(0.0465)
EPS2020 0.9760**
(0.0216)
ESGC2020 0.0462
(0.0235)
0.0700**
(0.0244)
0.1326**
(0.0421)
0.0141
(0.0130)
TA2020 -0.0027
(0.0306)
0.0023
(0.0315)
0.0525
(0.0547)
0.0602**
(0.0168)
LEV2020 -0.3004**
(0.0350)
-0.0220
(0.0331)
0.0066
(0.0561)
-0.0291
(0.0173)
LD2020 0.0947
(0.2149)
0.0792
(0.2230)
0.4601
(0.3826)
0.0938
(0.1194)
CDL2020 -0.0176
(0.0356)
-0.0069
(0.0370)
0.2239**
(0.0626)
0.0220
(0.0196)
GDPC2020 0.0147
(0.0258)
0.0409
(0.0266)
0.3951**
(0.0464)
0.0915**
(0.0168)
N (df) 331 (323) 328 (320) 331 (323) 329 (321)
F 87.38** 42.57** 15.05** 466.3**
Adj. R2
.6469 .4709 .2296 .9085
Notes. * p < .05; ** p < .01. All coefficient estimates (β) are standardized.
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
84
Equation (5) was used to obtain results in robustness tests, from three
subsamples: European banks, North American banks, and East Asian banks.
In Europe (subsample of 90 companies, results not tabulated), during the
pandemic, the environmental score, the social responsibility score, and the quality
of corporate governance for 2020 did not have a significant effect on any of the
dependent variables for 2021. ROA, ROE, and EPS for 2020 positively influenced
the respective financial indicators for 2021, while SMR 2021 was negatively
correlated with the SMR for 2020. The ROA indicator in 2021 was negatively
influenced by LEV from the previous year (β = -.1993, p = .0035). As such, H1, H2
and H3 are not supported by the results, meaning that environmental performance,
social responsibility initiatives and corporate governance quality recorded in the
first year of the pandemic did not have a significant effect on the financial
performance during the pandemic, for the subsample of European banks.
In the United States of America and Canada (subsample of 91 companies,
results not tabulated), during the pandemic, the environmental score, the social
score, and corporate governance quality for 2020 did not have a significant effect
on any of the dependent variables for 2021. ROA in 2021 was negatively
influenced by LEV for 2020 (β = -.2800, p = .0283), while ROE and SMR in 2021
were positively influenced by the same variable. The results do not support H1, H2
and H3, meaning that environmental performance, social responsibility initiatives
and corporate governance quality from the first year of the pandemic had no
significant influence on the financial performance during the pandemic, for the
United States and Canada.
In East Asia (subsample of 63 companies, see Table 7), during the
pandemic, the environmental score for 2020 negatively influenced EPS for 2021,
while the quality of corporate governance was a positive factor for SMR and EPS
in 2021. The social responsibility score for 2020 did not have a significant effect
on any of the dependent variables for 2021, contrary to the results for the entire
sample in Table 5. SMR 2021 was negatively influenced by bank size and
positively influenced by LEV for 2020. EPS in 2021 was positively influenced by
EPS and LD for 2020. H1 is confirmed, as the environmental performance from the
first pandemic year had a negative influence on EPS during the pandemic, H2 is not
supported by the results, while H3 is confirmed for the SMR and EPS of East Asian
banks.
The main explanation for these results is that small effects can become
significant in larger samples. Standardized coefficients indicate the comparative
magnitude of the effect, and in most cases, the influence of ESG variables on
financial performance is the weakest in the list of significant coefficients. An
implication of these results is that some ESG factors, while significant, improve
financial performance by a very small margin. In the banking sector, the social
pillar appears to be the most relevant ESG factor because direct environmental
impacts are negligible and corporate governance is highly standardized. Banks are
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
85
expected to pay attention to community involvement during and after the Covid-19
pandemic, to improve their tarnished reputation from the financial crisis of 2008.
Table 7. Regression estimates of Equation (5) for East Asia
Dependent variables
ROA2021 ROE2021 SMR2021 EPS2021
Factors Std. β (SD) Std. β (SD) Std. β (SD) Std. β (SD)
Intercept -0.3303**
(0.0317)
-0.3658**
(0.0451)
-0.3730**
(0.1112)
-0.1070**
(0.0196)
ROA2020 1.1300**
(0.0738)
ROE2020 0.9229**
(0.1023)
SMR2020 -0.0323
(0.0806)
EPS2020 0.9818**
(0.0255)
E2020 -0.0299
(0.0292)
0.0129
(0.0422)
0.1179
(0.1055)
-0.0391*
(0.0185)
S2020 0.0287
(0.0209)
0.0416
(0.0307)
0.0952
(0.0764)
0.0253
(0.0131)
G2020 -0.0014
(0.0192)
0.0055
(0.0282)
0.1744*
(0.0673)
0.0302*
(0.0117)
TA2020 -0.0307
(0.0234)
-0.0707*
(0.0346)
-0.2513**
(0.0820)
0.0035
(0.0147)
LEV2020 0.0408
(0.0314)
0.1075**
(0.0350)
0.1833*
(0.0825)
0.0015
(0.0146)
LD2020 0.4028*
(0.1782)
0.4658
(0.2583)
-0.1613
(0.6024)
0.3139**
(0.1165)
CDL2020 0.0147
(0.0292)
0.0008
(0.0431)
-0.0909
(0.1034)
0.0288
(0.0195)
GDPC2020 -0.0417
(0.0444)
-0.1792*
(0.0785)
-0.1256
(0.1248)
-0.0384
(0.0233)
N (df) 63 (53) 63 (53) 63 (53) 63 (53)
F 100.7** 44.56** 5.363** 387.6**
Adj. R2
.9354 .8634 .3878 .9825
Notes. * p < .05; ** p < .01. All coefficient estimates (β) are standardized.
5. Conclusions
The present study uses ESG performance indicators extracted from
Refinitiv Eikon to identify causal relationships between the three pillars of ESG
and the financial performance of banks located in Europe, the Americas, and Asia,
before and during the Covid-19 pandemic. Causality is demonstrated by the fact
that the ESG factors precede by one year the financial performance of the sample
banks. This research design has proven to be effective in separating the effects of
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
86
ESG performance on different aspects of financial performance at the beginning
and during the pandemic.
Bank environmental performance in 2019 has a negative influence on the
return on equity during 2020, and no other ESG factors are significant. This
indicates that banks with a more pronounced involvement in environmental
protection (directly or indirectly) generated a lower return on net assets. However,
this relationship is not robust in other specifications. Therefore, it is assumed that
the ESG performance of banking institutions in 2019 is a non-significant factor of
financial performance in the first year of the pandemic. These results point to the
fact that any amount of preparation in the ESG domain could not offset the
negative effects of the pandemic crisis. These results are limited to the banking
sector.
The second series of models capture the effect of ESG performance on
financial performance during the pandemic. For the entire sample, social
responsibility expenditures and initiatives in 2020 positively influenced bank
profitability in 2021. This result is robust because the causal relationship is
confirmed for ROA, ROE, and EPS. However, this significant result cannot be
found in any of the sub-samples for Europe, USA and Canada, and East Asia. In
addition, banks in East Asia have a higher SMR and EPS determined by the quality
of corporate governance in the previous year. The environmental performance of
2020 has a negative influence on EPS in 2021, but only for the sample in East Asia.
These results point to structural differences at the global level, which need to be
further investigated for the year 2022 and beyond.
The main implication of the results is that there seems to be an
improvement in 2021 over 2020. Our research offers an optimistic outlook for the
implementation of ESG principles in banks around the world. Financial institutions
are beginning to develop internal ESG assessment criteria and allocate increasing
budgets for this activity. The effect of ESG factors on financial performance would
become more pronounced if customers and markets learn to rely on these
indicators. ESG measurement is still not mature enough to generate confidence at
the market level. Therefore, customers and investors must understand ESG
assessment and scoring so that these factors have a discernible impact on the
financial performance of banks. Future research can aim to pinpoint exactly what
components of social responsibility are most valued by bank customers and
investors.
REFERENCES
[1] Badea, L., Moraru, A.-D., Ilie, C., Duhnea, C. & Panait, I. (2021), Customer
Satisfaction with Banking Services. Simulating the Influence of Customer
Satisfaction Determinants Using Artificial Neural Network Algorithms.
Economic Computation and Economic Cybernetics Studies and Research, 55(3),
101–115. https://doi.org/10.24818/18423264/55.4.21.07; ASE Publishing;
The Influence of ESG Factors on Financial Performance in the Banking Sector
during the Covid-19 Pandemic
_________________________________________________________________
87
[2] Bătae, O. M., Dragomir, V. D. & Feleagă, L. (2020), Environmental, Social,
Governance (ESG), and Financial Performance of European Banks. Journal of
Accounting and Management Information Systems, 19(3).
https://doi.org/10.24818/jamis.2020.03003;
[3] Bătae, O. M., Dragomir, V. D. & Feleagă, L. (2021), The Relationship
between Environmental, Social, and Financial Performance in the Banking
Sector: An European Study. Journal of Cleaner Production, 290, 125791.
https://doi.org/10.1016/j.jclepro.2021.125791;
[4] Buallay, A. (2019), Is Sustainability Reporting (ESG) Associated with
Performance? Evidence from the European Banking Sector. Management of
Environmental Quality: An International Journal, 30(1), 98–115.
https://doi.org/10.1108/MEQ-12-2017-0149;
[5] Dragomir, V. D. (2013), Environmental performance and responsible
corporate governance: an empirical note. E & M Ekonomie a Management, 16(1),
33-51. https://dspace5.zcu.cz/handle/11025/17484
[6] Dragomir, V. D. (2018), How Do We Measure Corporate Environmental
Performance? A Critical Review. Journal of Cleaner Production, 196, 1124–1157.
https://doi.org/10.1016/j.jclepro.2018.06.014;
[7] Dragomir, V. D., Gorgan, C., Calu, D.-A. & Dumitru, M. (2022), The
Relevance and Comparability of Corporate Financial Reporting Regarding
Renewable Energy Production in Europe. Renewable Energy Focus, 41, 206–215.
https://doi.org/10.1016/j.ref.2022.03.002;
[8] Esteban-Sanchez, P., de la Cuesta-Gonzalez, M. & Paredes-Gazquez, J. D.
(2017), Corporate Social Performance and its Relation with Corporate Financial
Performance: International Evidence in the Banking Industry. Journal of
Cleaner Production, 162, 1102–1110. https://doi.org/10.1016/j.jclepro.2017.06.127
[9] Gangi, F., Meles, A., D’Angelo, E. & Daniele, L. M. (2019), Sustainable
Corporate Social Responsibility Development and Corporate Governance in the
Financial System: Are Environmentally Friendly Banks Less Risky?
Environmental Management, 26(3), 529–547. https://doi.org/10.1002/csr.1699;
[10] Hagendorff, J., Collins, M. & Keasey, K. (2010), Board Monitoring,
Regulation, and Performance in the Banking Industry: Evidence from the
Market for Corporate Control. Corporate Governance: An International Review,
18(5), 381–395. https://doi.org/10.1111/j.1467-8683.2010.00815.x;
[11] Jo, H., Kim, H. & Park, K. (2015), Corporate Environmental Responsibility
and Firm Performance in the Financial Services Sector. Journal of Business
Ethics, 131(2), 257–284. https://doi.org/10.1007/s10551-014-2276-7;
[12] Levanti, D.-A., Ștefănescu, A. & Pitulice, I. C. (2021), Explanatory Factors
of Lease Disclosure Level of Banks: Central and Eastern Europe Evidence.
Economic Computation and Economic Cybernetics Studies and Research;
55(4/2021), 241–258. https://doi.org/10.24818/18423264/55.4.21.16;
Voicu Dan Dragomir, Oana Marina Bătae, Bogdan Ștefan Ionescu,
Liliana Ionescu-Feleagă
_______________________________________________________
88
[13] Matei, F. B., Boboc, C. & Ghiță, S. (2021), The Relationship between
Corporate Social Responsibility and Financial Performance in Romanian
Companies. Economic Computation and Economic Cybernetics Studies and
Research, 55(3/2021), 297–314. https://doi.org/10.24818/18423264/55.3.21.19;
[14] Miralles-Quirós, M. M., Miralles-Quirós, J. L. & Redondo-Hernández, J.
(2019), The Impact of Environmental, Social, and Governance Performance on
Stock Prices: Evidence from the Banking Industry. Corporate Social
Responsibility and Environmental Management, 26(6), 1446-1456.
https://doi.org/10.1002/csr.1759;
[15] Nițescu, D.-C. & Cristea, M.-A. (2020), Environmental, Social and
Governance Risks – New Challenges for the Banking Business Sustainability.
Amfiteatru Economic, 22(55), 692–706. https://doi.org/10.24818/EA/2020/55/692;
[16] Nizam, E., Ng, A., Dewandaru, G., Nagayev, R. & Nkoba, M. A. (2019),
The Impact of Social and Environmental Sustainability on Financial
Performance: A Global Analysis of the Banking Sector. Journal of Multinational
Financial Management, 49, 35–53. https://doi.org/10.1016/j.mulfin.2019.01.002;
[17] Scholtens, B. (2009), Corporate Social Responsibility in the International
Banking Industry. Journal of Business Ethics, 86(2), 159–175.
https://doi.org/10.1007/s10551-008-9841-x;
[18] Shakil, M. H., Mahmood, N., Tasnia, M. & Munim, Z. H. (2019), Do
Environmental, Social and Governance Performance Affect the Financial
Performance of Banks? A Cross-Country Study of Emerging Market Banks.
Management of Environmental Quality: An International Journal, 30(6), 1331–
1344. https://doi.org/10.1108/MEQ-08-2018-0155;
[19] Shen, C.-H., Wu, M.-W., Chen, T.-H. & Fang, H. (2016), To Engage or
Not to Engage in Corporate Social Responsibility: Empirical Evidence from
Global Banking Sector. Economic Modelling, 55, 207–225.
https://doi.org/10.1016/j.econmod.2016.02.007;
[20] Soana, M.-G. (2011), The Relationship between Corporate Social
Performance and Corporate Financial Performance in the Banking Sector.
Journal of Business Ethics, 104(1), 133–148. https://doi.org/10.1007/s10551-011-
0894-x;
[21] Tachiciu, L., Fulop, M. T., Marin-Pantelescu, A., Oncioiu, I. & Topor, D.
I. (2020), Non-financial Reporting and Reputational Risk in the Romanian
Financial Sector. Amfiteatru Economic, 22(55), 668–691.
https://doi.org/10.24818/EA/2020/55/668;
[22] Uddin Ahmed, S., Parvez Ahmed, S. & Hasan, I. (2018), Why Banks
Should Consider ESG Risk Factors in Bank Lending? Banks and Bank Systems,
13(3), 71–80. https://doi.org/10.21511/bbs.13(3).2018.07;
[23] Wu, M.-W. & Shen, C.-H. (2013), Corporate Social Responsibility in the
Banking Industry: Motives and Financial Performance. Journal of Banking &
Finance, 37(9), 3529–3547. https://doi.org/10.1016/j.jbankfin.2013.04.023.