21. Stock Market Reactions to ESG Dynamics: A European Banking Perspective

The actions taken worldwide to combat the effects of climate change have boosted the analysis of related economic risks in the financial sector on the three components: environment, social, and governance (ESG). ESG scores calculated by specialized providers for listed companies are increasingly taken into account, in addition to economic and financial ones, demonstrating the importance of these factors for the financial system. Some studies show that from the investors’ point of view, pursuing ESG objectives positively limits legal and reputational risks, firm performance, and the perception of firms’ risk profiles. These factors help reduce the risk premium and cost of capital, benefiting financial performance. Based on these findings, we considered investigating the reaction of listed European banks’ returns to ESG value changes. The analysis covers the stock prices of all banks traded on stock exchanges from Europe, considering the analysis of daily frequencies between 2010 and 2021. We collected data on the values of ESG components for all these companies and created a database with all moments when changes in these values took place. Further, we run an event study analysis of the impact of these modifications on the dynamics of stock market log returns for the sample of banks. Our objective is to quantify investors’ reactions to these changes and document differences in responses to increased versus decreased values of ESG.