Does Board Composition Taking Account of Sustainability Expertise Influence ESG Ratings? An Exploratory Study of European Banks

In the context of the European Green Deal, the European Commission opened a consultation on the realignment of corporate governance with key aspects of a sustainable economy in late 2020. Based on the understanding that board composition is considered a key factor to promote sustainable business management (EU Commission and EY 2020), the European Commission is considering enforcing legislative measures regarding sustainability expertise on boards. Why sustainability expertise on boards drives sustainability forward is substantiated by different theories, such as the resource dependency theory, human capital theory, agency theory and social psychological theory (Carter et al. 2010). Academic literature in the area of ESG performance in relation to board characteristics most widely uses the variables (gender) diversity, the share of independent directors, board size and the existence of a sustainability committee (Birindelli et al. 2018). The impact of sustainability expertise on ESG performance has not been studied so far. This study examines if the number of board directors with sustainability expertise and sustainability leadership have a positive effect on the ESG ratings of EURO STOXX Banks 30. Results indicate that sustainability expertise on boards and sustainability leadership with major European banks is still rather low. Encouraging results could be found supporting the hypotheses.