ESG reputational risk and market valuation: Evidence from the European banking industry

• Published in: Research in international business and finance 2024-04, Vol.69, p.102286, Article 102286
• Main Authors: Mandas, Marco, Lahmar, Oumaima, Piras, Luca, De Lisa, Riccardo
• Format: Article
• Language: English
• Subjects: Bayesian estimation; ESG; Market valuation; Panel vector autoregression system; Reputational risk
• ISSN: 0275-5319; 1878-3384
• DOI: 10.1016/j.ribaf.2024.102286

This study examines the potential bidirectional linkage between reputational risk exposure associated with Environmental, Social and Governance (ESG) factors and market valuation in the banking sector. We build a monthly panel dataset for 19 European listed banks from 2012 to 2020. We employ a Bayesian Panel Vector Autoregressive model to examine the dynamics between the two variables of interest. The findings show an inverse bidirectional causality between ESG reputational risk exposure and banks’ market valuation and suggests that the impact of ESG reputational risk shocks on market valuation is more significant for high-exposed banks. Our results are consistent with the stakeholder and slack resources theories and highlight the importance of ESG factors in influencing the banks’ market valuation. Moreover, the study demonstrates how prior financial performances impact the ESG reputational exposure. These insights provide guidance on how banks can manage their ESG risks to enhance brand identity and market value. [Display omitted] •The study examines the bidirectional linkage between ESG reputational risk and banks’ market valuation.•We employ a Bayesian PVAR to study the dynamics between the Price to Book ratio and the RepRisk Index.•We find an inverse bidirectional causality between ESG reputational risk exposure and banks’ market valuation.•Results suggests that the impact magnitude of an ESG reputational risk shock on market valuation depends on the initial level of ESG risk exposure.