Corporate Social Responsibility and Bank Risk

Abstract

In this study, we analyse the impact of Corporate Social Responsibility (CSR) on idiosyncratic bank risk. Our sample comprises 3,392 banks from 121 countries over the period from 2002 to 2018. We approximate CSR by the Thomson Reuters' ESG company ratings. By using the risk measures z-score and risk density, we address both, default and portfolio risk. Based on the established theory, we assumed a negative relationship between CSR and idiosyncratic risk. Our empirical results confirm a risk-reducing effect of the overall CSR on default and portfolio risk. Looking separately at the three CSR-pillars - i.e. environmental, social, and governance - a significant negative influence on bank's individual default risk can be inferred. In addition, we observe a risk-reducing effect of the environmental pillar on portfolio risk. On a further disaggregated level, we find strong significance for five of ten sub-components of CSR. In particular, all environmental sub-components - i.e. Innovation, Emissions, and Resource Use - affect both risk measures significantly. On the other hand, Human Rights and the CSR-Strategy are the only sub-components from the social, respectively from the governance pillar with comparable significant effects. Finally, controversies decrease idiosyncratic bank stability.

Keywords: Bank Risk, Default Risk, Portfolio Risk, CSR, ESG

JEL Classification: G21; G32; M14; Q56