Why banks should consider ESG risk factors in bank lending?
-
Author(s)Sarwar Uddin AhmedLink to ORCID Index: https://orcid.org/0000-0002-6743-2794
,
Samiul Parvez AhmedLink to ORCID Index: https://orcid.org/0000-0001-9273-6581
,
Ikramul HasanLink to ORCID Index: https://orcid.org/0000-0001-5510-1341
-
DOIhttp://dx.doi.org/10.21511/bbs.13(3).2018.07
-
Article InfoVolume 13 2018, Issue #3, pp. 71-80
- Cited by
- 2819 Views
-
1132 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
Why banks should be concerned about incorporating environmental, social and governance (ESG) criteria in the lending process? What is the motivation? This study aims to find the motives for considering environmental, social and governance (ESG) criteria in bank lending process. A primary survey has been conducted to know the current status and motivation for incorporating ESG factors in investment decisions. Sample comprised 30 private commercial banks (PCBs) operating in Bangladesh. Data collected were analyzed with graphs, descriptive statistics, and regression analysis. Findings of the study indicate that banks are mostly considering basic environmental, social and governance factors set by regulators qualitatively. They are lagging behind in considering the advanced ESG criteria needed for sustainable and efficient credit risk management. Based on motivation for incorporating ESG factors, it was found that banks pioneering in incorporating ESG factors in lending decisions are compensated through better financial performance. Findings of the study are expected to encourage practitioners and policy-makers to take more pragmatic steps to incorporate ESG risk factors quantitatively in lending decision-making process.
- Keywords
-
JEL Classification (Paper profile tab)G21, G23, G34, Q51
-
References38
-
Tables5
-
Figures3
-
- Figure 1. Environmental issues considered in lending (respondents were allowed to pick multiple choices)
- Figure 2. Social issues considered in lending (respondents were allowed to pick multiple choices)
- Figure 3. Governance issues considered in ESG risk assessment (respondents were allowed to pick multiple choices)
-
- Table 1. Factors considered in calculating ESG score
- Table 2. Descriptive statistics and Pearson correlations
- Table 3. Results of the regression analysis for ESG as an independent variable
- Table 4. Results of the regression analysis for environment, social, and governance as independent variables and turnover as the proxy for size
- Table 5. Results of the regression analysis for environment, social, and governance as independent variables and total asset as a proxy for size
-
- Ahmed, S. U., & Uchida, S. (2012). Environmental Risk Management Practice of Banks. Aichi-Gakuin University Review Papers, 53(1), 91-98.
- Ahmed, S. U., Islam, M. Z., Mahtab, H., & Hasan, I. (2014). Institutional Investment and Corporate Social Performance: Linkage Towards Sustainable Development. Corporate Social Responsibility and Environmental Management, 21(1), 1-13.
- Ahmed, S. U., & Rahman, M. (2014). Incorporating ESG Risk in Bank-Lending in Bangladesh. International Journal of Finance and Economics, 120, 23-34.
- AIMH CSP Index (2011). Ahmed, Islam, Mahtab and Hassan Corporate Social Performance Index, Copyright Office, Government of the People’s Republic of Bangladesh, 12349-COPR.
- Bangladesh Bank (BB) (2008). Mainstreaming Corporate Social Responsibility (CSR) in banks and financial institutions in Bangladesh. DOS Circular No. 1, Dhaka.
- Bangladesh Bank (BB) (2011a). Environmental Risk Management (ERM) Guidelines for Banks and Financial Institutions in Bangladesh. Dhaka.
- Bangladesh Bank (BB) (2011b). Policy Guidelines for Green Banking. BRPD Circular No. 2, Dhaka.
- Baron, D. (2008). Managerial Contracting and Corporate Social Responsibility. Journal of Public Economics, 92, 268-288.
- Bauer, R., Guenster, N., & Otten, R. (2004). Empirical Evidence on Corporate Governance in Europe: The Effect on Stock Returns, Firm Value and Performance. Journal of Asset Management, 5(2), 91-104.
- Benabou, R., & Tirole, J. (2010). Individual and Corporate Social Responsibility. Economica, 77, 1-19.
- Besley, T., & Ghatak, M. (2007). Retailing Public Goods: The Economics of Social Responsibility. Journal of Public Economics, 91, 1645-1663.
- Black, B. (2001). Does Corporate Governance Matter? A Crude Test Using Russian Data. University of Pennsylvania Law Review, 149, 2131-2150.
- Cowton, C. J., & Thompson, P. (2000). Does Codes Make a Difference? The Case of Bank Lending and the Environment. Journal of Business Ethics, 24, 165-178.
- De Jong, A., DeJong, D. V., Mertens, G., & Wasly, C. E. (2005). The Role of Self-Regulation in Corporate Governance: Evidence and implication from the Netherlands. Journal of Corporate Finance, 11(3), 473-503.
- Derwall, J., & Verwijmeren, P. (2007). CSR and the cost of equity capital. In J. Derwall (Ed.), The Economic Virtues of SRI and CSR (ERIM Ph.D. Series Research in Management) (pp.193-213). Haveka.
- Derwall, J., Gunster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 61-63.
- Drobetz, W., Schillhofer, A., & Zimmermann, H. (2004). Corporate Governance and Expected Stock Returns: Evidence from Germany. European Financial Management, 10(2), 267-293.
- EP (2014). Guidance to EPFIs on Incorporating Environmental and Social Considerations into Loan Documentation, Equator Principles.
- Fama, E., & MacBeth, J. (1973). Risk, return and equilibrium: empirical tests. Journal of Political Economy, 81, 607-636.
- Fisher-Vanden, K., & Thorburn, K. (2010). Voluntary Corporate Environmental Initiatives and Shareholder Wealth (Working paper). Pennsylvania State University.
- Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210-233.
- Gillan, S., Hartzell, J., Koch, A., & Starks, L. (2010). Firms’ Environmental, Social and Governance (ESG) Choices, Performance and Managerial Motivation.
- Gompers, A., Ishii, J., & Metrick, A. (2003). Corporate Governance and Equity Prices. Quarterly Journal of Economics, 118, 107-55.
- Johnson, R. D., & Greening, D. W. (1999). The Effects of Corporate Governance and Institutional Ownership Types on Corporate Social Performance. Academy of Management Journal, 42(5), 564-576.
- Manescu, C. (2011). Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk? Sustainable Development, 19, 95-118.
- Margolis, J., & Elfenbein, H. (2008). Do Well by Doing Good: Don’t Count On It. Harvard Business Review.
- McGuire, J. B., Sundgren, A., & Schneeweis, T. (1988). Corporate Social Responsibility and Firm Financial Performance. Academy of Management Journal, 31(4), 854-872.
- McWilliams, A., & Siegel, D. (2000). Corporate Social Responsibility and Financial Performance: Correlation or Misspecification? Strategic Management Journal, 21(5), 603-609.
- Sahoo, P., & Nayak, B. (2008). Green Banking in India (Discussion Paper Series No. 125). Institute of Economic Growth, University of Delhi.
- Sarokin, D., & Schulkin, J. (1991). Environmental Concerns and the Business of Banking. Journal of Commercial Bank Lending, 74(5), 6-19.
- Securities and Exchange Commission (SEC) (2006). Notification on Corporate Governance, 2006-158, January, 2006.
- Smith, D. R. (1993). Environmental Risk: Credit Approaches and Opportunities (An Interim Report). United Nations Environment Programme, Geneva.
- Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65, 33-46.
- Thompson, P., & Cowton, C. J. (2004). Bringing the Environment into Bank Lending: Implications for Environmental Reporting. The British Accounting Review, 36(2), 197-218.
- UNEP-FI-ATF (2007). Banking on Value: A New Approach to Credit Risk in Africa (A report of the United Nations Environment Programme Finance Initiative (UNEP FI) African Task Force (ATF)).
- Waddock, S. A., & Graves, S. B. (1997). The Corporate Social Performance-Financial Performance Link. Strategic Management Journal, 18(4), 303-319.
- Wanless, D. (1995). The Gilbart Lecture 1995: Banking and the Environment. London: Chartered Institute of Bankers.
- Weber, O., Hoque, A., & Islam, M. A. (2015). Incorporating environmental criteria into credit risk management in Bangladeshi banks. Journal of Sustainable Finance and Investment, 5(1-2), 1-15.
-
Industrial development in Saudi Arabia: disparity in growth and development
Anis Ali
doi: http://dx.doi.org/10.21511/ppm.18(2).2020.03
Problems and Perspectives in Management Volume 18, 2020 Issue #2 pp. 23-35 Views: 3013 Downloads: 1023 TO CITE АНОТАЦІЯIndustrial development in any nation plays a vital role in the strengthening of the economy and employs human resources as per specifications and directly towards the mainstream of the nation. In Saudi Arabia, there was rapid industrialization for four decades. Some manufacturing industries performed well, while some internal and external business environment factors influenced the others’ performance. The study focuses on historical development, as well as recent trends of well-performing and poor-performing industries of Saudi Arabia. Small manufacturing industries in Saudi Arabia are underdeveloped and need more attention to attain sustainable and progressive growth rate in the form of the number of establishments to enjoy the potential. Manufacture of tobacco, computer, electronics and optics, pharmaceuticals and transport equipment are the deprived and underdeveloped industries of the manufacturing sector. There should be some easy credit schemes for the development of deprived or underdeveloped manufacturing industries. To attain sustainable growth and development of the manufacturing sector, a positive attitude of the government towards underdeveloped manufacturing industries, favorable labor laws, and entrepreneurial awareness, technical and financial assistance are necessary. The growth and development of the manufacturing sector of Saudi Arabia will be helpful in the attainment of goals of Vision 2030.
-
Integrated reporting and financial performance of South African listed banks
Reon Matemane ,
Rozane Wentzel
doi: http://dx.doi.org/10.21511/bbs.14(2).2019.11
Banks and Bank Systems Volume 14, 2019 Issue #2 pp. 128-139 Views: 2771 Downloads: 540 TO CITE АНОТАЦІЯThe recent development of integrated reporting intends to address the limitations associated with corporate reporting practices. This paper aims to examine whether a statistically significant relationship exists between integrated reporting quality and financial performance. Secondary data was used, namely the integrated reports and annual financial statements of South African banks listed on the Johannesburg Stock Exchange (JSE) for 2010–2014. For the period 2005–2009, only the financial statements were used, since integrated reporting was not yet mandatory. The research design was longitudinal and it combined qualitative and quantitative methods. Descriptive statistics and Feasible Generalized Least Square (FGLS) were used to explore the relationships between financial performance and integrated reporting quality. The results indicate that there is a positive relationship between integrated reporting quality (IRQ) and earnings per share (EPS). However, there is no significant relationship between IRQ and Tobin’s q (Q-Ratio), IRQ and return on equity (ROE), IRQ and return on assets (ROA) as well as IRQ and economic value added (EVA). Moreover, there are no significant differences on the financial performance of the listed banks before and after the introduction of integrated reporting.
-
ERP implementation in banks: success factors & impact on financial performance
Banks and Bank Systems Volume 12, 2017 Issue #4 pp. 17-30 Views: 2716 Downloads: 1146 TO CITE АНОТАЦІЯThe study aims to measure the extent of implementing ERP systems in the banking sector in Jordan, and identify the main factors that influence the implementation decision, in addition to measure the impact of the post-implementation of the ERP system on the financial performance. The study utilized a content analysis as a research instrument. The study of population consisted of all the banks in Jordan, where the study applied ‘Purposive Sample’ type. Therefore, the study included 11 banks from 2011 to 2016.
The study indicated that the implementation year of the ERP system started in most of the Jordanian banks in 2013, and the rates vary from bank to bank according to their importance and the level of awareness. Training courses are considered the main variable that these banks face in the process of implementation. In addition, awareness of the advantages, the cost, and supporting the infrastructure are the core factors needed to influence the implementation decision.
There is no impact when implementing an ERP system on the financial performance of the Jordanian banks in regard to the ROI and the DPS; on the other hand, there is an impact of the ERP system on the overall performance of the banks.
The study recommends to disseminate knowledge on the advantages of implementing of ERP system in Jordanian banks and to develop the IT department efficiency. Moreover, it will be worthwhile to examine the effect of ERP systems by utilizing financial and non-financial measurements.
