Corporate Social Responsibility in European Banks: do ESG scores affect performance and risk-taking behavior?

We investigate the influence of Environmental, Social, and Governance (ESG) scores on the risk-taking behavior and performance of European banks. Our findings indicate that higher ESG scores correlate with decreased risk-taking by banks, aligning with the stakeholder perspective on ESG activities. However, we also observe that higher ESG scores lead to a reduction in bank performance, supporting the overinvestment view of ESG, where limited resources are redirected from investments. In conclusion, we identify a trade-off between mitigating bank risk-taking for a more stable financial system and optimizing bank value and performance.