Sustainable development and corporate governance in the financial system: Are environmentally friendly banks less risky?

Abstract This paper responds to the need for a deeper empirical investigation of the impact of corporate social responsibility pillars on the financial performance of banks. To address this question, this study first analyzes the factors that encourage banks to be more environmentally friendly and then investigates the relationship between a bank's environmental engagement and its risk. Using a sample of 142 banks from 35 countries covering the period from 2011 to 2015, we document the positive impact of effective corporate governance mechanisms on banks' environmental engagement. Moreover, by using the Heckman's two‐stage model for the treatment of sample selection bias, we find that banks that are more sensitive to environmental issues also exhibit less risk. Stakeholder theory and the conflict resolution hypothesis are useful frameworks to overcome the trade‐off between economy and ecology in the banking industry.