Why banks should consider ESG risk factors in bank lending?
-
DOIhttp://dx.doi.org/10.21511/bbs.13(3).2018.07
-
Article InfoVolume 13 2018, Issue #3, pp. 71-80
- Cited by
- 2794 Views
-
1124 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.