The Value-Relevance of ESG Scores:A Fair Value Hierarchy Perspective with Evidence from European Banks
41 Pages Posted: 21 Feb 2024
Abstract
Using hand-collected accounting data on 154 European banks, we investigate the impact of ESG scores on the value-relevance of the fair value hierarchy (FVH) of financial instruments held on their balance sheets. Our findings are multi-faceted. Banks that possess an ESG score are valued at a premium on book value and the presence of the ESG score is associated with lower (higher) value-relevance of Level 1 (Level 2 and 3) reported fair value. The value relevance of Level 2 and 3 FVH levels, however, decreases in the ESG score. These findings imply that stock market investors either do not treat the ESG score as a reliable measure of ESG performance or, embracing the “overinvestment view” rather than the “risk mitigation view” of Corporate Social Responsibility, do not associate positive ESG performance to greater corporate transparency and trustworthiness.
Keywords: Banks, CSR, ESG, fair value hierarchy, Value Relevance
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