In a new article, we aim to identify the elements and stages that have led to increased attention to corporate social responsibility issues, especially with regard to environmental, social, and governance factors, and to focus on the meaning of each element of the ESG acronym. Moving from a theoretical to an empirical study, we also analyze the 2017 non-financial disclosure reports (released in 2018) of all European listed companies and examine the resulting 1194 companies that, according to Thomson Reuters Business Classification data, are mainly from the financial industry (296, or 24.79 percent) and the consumer goods and industrial sectors (respectively, 258, 21.61 percent and 204, 17.09 percent). As far as the selected companies are concerned, we explored the distinctive board characteristics through the review of all corporate governance reports and statements to assess whether some of those qualities are more likely to favor ESG policies, on the one hand, and whether the relationship between ESG performance and the economic and financial value of the companies considered is, on other hand, more conducive to ESG policies.  We selected these two parameters because academic scholarship does not have a common understanding of their impacts and implications.

In light of the results achieved in that first phase, our attention shifted to the banking field, in order to establish to what extent ESG performance exerts an influence on certain key factors (performance, corporate value, and merger and acquisition transactions). We chose banks because they can play a key role in economic development, given their ability to discreetly allocate monetary resources to companies engaged in diverse economic fields, as well as to private individuals. The involvement of banks in sustainable practices should not only benefit the bank itself, especially in terms of reputation, but also encourage the adoption of viable policies by its customers, thus exerting a significant positive knock-on influence on other economic players to achieve the ultimate goal of global sustainable growth. Moreover, from a purely practical and quantitative perspective, it is clear that placing emphasis on banks ensures a homogeneous reference sample. Lastly, the banking sector has been extensively regulated. Examples of our results are as follows.

First, in May 2018, the European Commission proposed to set up a Technical Expert Group on Sustainable Finance within the Committee to verify the development of a uniform classification of sustainable development. Moreover, the Commission adopted in May 2018 a package of measures implementing several key actions announced in its action plan on sustainable finance, among which we can recall the amendment of Directive (EU) 2016/2341, introducing reporting requirements precisely in relation to environmental, social, and governance (ESG) factors. In April 2019, the European Banking Authority also joined the Network for Greening the Financial System and organized a workshop on sustainable finance, underlining the need to incorporate this philosophy into the banking sector and particularly into risk management. An EBA-EBF joint workshop was organized in April 2019 to monitor progress and to investigate how banks understand ESG risks and integrate them into business strategy and risk management.

At the national level, the Bank of Italy has stressed the need to strengthen the sustainability of financial investments, engaging above all in sustainable economic development, giving priority in investment choices to companies adopting virtuous practices that respect the environment, and ensuring inclusive workplaces sensitive to human rights and adopting the best practices of corporate governance. Moreover, in March 2019, the Banque de France (BdF) set its responsible investment strategy in a clear document, which will integrate ESG criteria into its investment strategies, while the Dutch Central Bank announced that it had become the first central bank to incorporate ESG analysis and to integrate international standards, such as the principles of the United Nations Global Compact.

The focus on improving central bank information and engagement echoes some of the provisions mentioned in the Shareholder Rights Directive (SHRD II).

Our paper shows a significant positive correlation between the return on assets (ROA) of European banks and ESG performance (predominantly in relation to its social factor). This implies that investing in activities with a positive impact on the environment and on shareholders and stakeholders’ relationships and internal governance systems allows banks to improve economic performance. Surprisingly, no correlation between firm value and ESG performance has been established in the European scenario here assessed, while a meaningful correlation is identified between ESG performance and premium acquisition, providing an insight into how investing in the ESG sector is extremely valuable and profitable.

Our findings have led us to make some recommendations on the ideal composition of boards of directors, especially when involved in M&A transactions, and to raise concerns about whether the pursuit of these objectives falls under the corporate purpose, and what are their respective implications and effects in relation to the fiduciary duties of directors.

This post comes to us from Brando Maria Cremona, an LLM candidate at Stanford Law School and a PhD candidate at Bocconi University, and Maria Lucia Passador, an academic fellow at Bocconi University. It is based on their recent paper, “What About the Future of European Banks? Board Characteristics and ESG Impact,” available here.