Is Sustainability Reporting (ESG) Associated with Performance? Evidence from the European Banking Sector

Is sustainability reporting (ESG) associated with performance?

Amina Buallay investigates in Is Sustainability Reporting (ESG) Associated with Performance? Evidence from the European Banking Sector » whether sustainability reporting actually improves financial performance, or is just another compliance burden.

She examines the impact of ESG disclosure on bank profitability by analysing 235 European banks over a ten-year period (2007-2016), using return on assets (ROA), return on equity (ROE), and Tobin's Q as performance indicators.

Her main conclusions include:

• ESG reporting correlates positively with financial performance, particularly for ROA (+3.2%) and Tobin's Q (+5.1%), suggesting a link between sustainability disclosure and bank value creation.
• Environmental disclosures drive ROA up by 2.8% and Tobin's Q up by 4.7%, which supports the idea that banks investing in environmental transparency tend to outperform.
• Social responsibility reporting negatively impacts all three performance measures, reducing ROA by 1.9%, ROE by 2.4%, and Tobin's Q by 1.2%, possibly due to the cost burden of implementing social initiatives without immediate financial returns.
• Corporate governance disclosure shows mixed effects: it negatively impacts ROA (-1.5%) and ROE (-2.1%) but enhances Tobin's Q (+3.0%), implying governance policies may boost market valuation without short-term profitability gains.
• Macroeconomic conditions (such as GDP growth and governance quality) significantly influence the relationship between ESG reporting and financial performance, with GDP growth of +1% amplifying ESG benefits by 0.5%.

This article suggests that banks should focus on environmental transparency as a value-enhancing strategy, which calls for adapting to inconsistent regulatory frameworks across different regions to align their disclosure capacities.

Financial practitioners must remain cautious about exaggerated sustainability claims and push for transparency beyond headline ESG scores so that disclosures are not merely compliance-driven but linked to real impact.

Naturally, ESG disclosures may not fully capture the operational complexities behind sustainability initiatives across various industries under different regulatory regimes.