Interactions between Corporate Social Responsibility, Firm Performance and Capital Adequacy in Banking Industry

Motivated by increasing worldwide attention to the “sustainability” pathway, this work aims to empirically investigate the relation between environmental, social, and governance (ESG) investments, corporate financial performance, and capital adequacy in the financial industry. Using accounting information from Bank Focus (Bureau Van Dijk) and ESG scores from Asset4 (Refinitiv), we analyze a large sample of worldwide banking firms within the period 2005 to 2019. To study the relationship between ESG, financial performance and capital adequacy dimensions, we perform a generalized method of moments (GMM) method. The results show that there are significant and joint relationships between ESG, financial performance and capital adequacy dimensions, suggesting that the endogeneity issue should not be negligible. First, the ESG impact depend on the specific proxy (channel) of financial performance and capital adequacy analyzed, consistently to a risk-taking theoretical framework. Secondly, the attention of the banking companies on ESG factors answers to an investment pattern and therefore to the uncertainty. Third, we find that the growth factor and agency costs (conflicts of interest between stakeholders) have the greatest impact on ESG, financial performance, and capital adequacy. Therefore, at the microeconomic level, to improve their sustainability financial companies could be encouraged to increase their ESG investments (integrating deeply ESG factors in internal risk appetite framework). Consequently, at the macroeconomic level to speed up the transition to a green economy, the actions of policymaker (or authority) should be mostly driven by incentives (or fewer regulatory constraints) for ESG expenditures/investments also in line with measurable sustainability targets.