Why banks should consider ESG risk factors in bank lending?

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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.

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    • 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