ESG Risk and Financial Performance of the U.S. Banks

This study examines the relationship of ESG risk score with the financial performance of 122 American banks for the year 2022.Cross-sectional regression analysis is applied.Financial performance is computed as the Return on Assets (ROA) and Return on Equity (ROE).The explanatory variables used are the ESG Risk Scores of banks calculated by Morningstar Sustainalytics, the size of banks, the leverage ratio, i.e., total liabilities to total assets, the liquidity ratio, i.e., current assets to current liabilities, the efficiency ratio, i.e., total revenue to total assets, and the revenue per employee.The results provide evidence of a negative relationship between financial performance and ESG risk score.On the other explanatory variables, size has no impact on performance.Interestingly enough, the impact of leverage on ROA is slightly negative but the impact on ROE is clearly positive.Liquidity is positively related to performance.The impact of efficiency and revenue per employee is positive too.