Supervisory sanctions, ESG practices, and banks’ reputation: a market performance analysis of sanctioned banks

The purpose of this paper is to study the impact of environmental, social, and governance (ESG) practices on banks’ reputation and market performance. In particular, we aim to analyse whether banks adopting ESG-compliant practices can reduce their reputational damage due to financial sanctions and increase their market performance. In order to demonstrate the effect of banks’ ESG practices in reducing reputational damage due to financial penalties imposed by supervisors for breaches of regulatory requirements, we analyze a sample of 21 banks - selected because of the availability of information on sanctions imposed by the supervisory authorities - by applying a pre-selection model based on the trend of historical returns. With reference to the selected sample, we verify the percentage of securities characterized by different levels of sanctions and different ESG scores. Overall, we find that ESG aspects have a positive impact on stock performance, although higher ESG scores do not, per se, mean a lower probability of sanctions. Differing from previous research, our study, by focusing on financial sanctions, provides useful insights concerning the ESG impact on both market performance and reputational aspects.