Does Firm Size Matter for ESG Risk? Cross-Sectional Evidence from the Banking Industry

The ambiguous evidence regarding the linkages between firm size and ESG risk in the relevant literature justifies the need for their further scientific investigation. A particularly interesting context for this task is offered by the banking industry, where financial institutions face both strong in...

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Bibliographic Details
Published in:Sustainability 2024-01, Vol.16 (2), p.679
Main Author: Bolibok, Piotr M
Format: Article
Language:English
Subjects:
Banking industry
Banks
Banks (Finance)
Hypotheses
Industrialized nations
International banking
International finance
Investors
Reputation management
Risk exposure
Social responsibility
Stakeholders
Sustainability
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Summary:The ambiguous evidence regarding the linkages between firm size and ESG risk in the relevant literature justifies the need for their further scientific investigation. A particularly interesting context for this task is offered by the banking industry, where financial institutions face both strong incentives to expand the scale of their activities and high reputational risk sensitivity. Given the above, this paper aims to systematize and enhance the theoretical underpinnings of the relationship between firm size and ESG risk in banks, highlighting its likely non-linear character, and to investigate it empirically in the cross-section of the international banking industry. This research employs uni- and multivariate, and linear and non-linear regression analyses applied to a sample of 668 banks that were assigned the Morningstar Sustainalytics ESG Risk Rating for the year 2021. The results demonstrate that, although, on average, size seems to be associated negatively with ESG risk in the cross-section, the relationship is in fact non-linear and follows a U-shaped pattern. The findings are robust regarding the impact of both country-specific contextual factors and outliers. This study emphasizes the importance of diseconomies of scale in ESG risk management, thus offering some important lessons and recommendations for bank executives and equity investors.
ISSN:2071-1050
2071-1050
DOI:10.3390/su16020679