Impact Of Environmental, Social, And Governance Risk On The Financial Performance Of Selected Indian Banks

Abstract

The importance of sustainable and responsible investment strategies has significantly increased due to the increasing awareness of environmental stability and the socioeconomic development of countries. This study seeks to explore how considering Environmental, Social, and Governance (ESG) factors in investment decisions can improve risk management and yield sustainable returns for investors. Specifically, it aims to investigate how ESG risk scores affect the financial performance of banks in India. The study evaluates financial performance using metrics such as return on assets (ROA), return on capital employed (ROCE), and return on equity (ROE), while also considering factors like size (represented by the logarithm of total assets) and leverage (measured by the Debt to Equity Ratio) as indicators of financial risk. Data from 25 public and private banks spanning the years 2021 to 2022 were analyzed in a cross-sectional manner. The study utilized Ordinary Least Squares (OLS) regression to examine how ESG risk affects the financial performance of Indian banks. The findings reveal a noteworthy adverse effect of environmental, social, and governance risk scores on the overall financial performance of these banks. The findings have practical implications for corporations, investors, regulators, and policymakers. The study highlights the need for adoption of sustainability reporting, including disclosure of ESG scores. This would go a long way towards improving sustainable business practices and the long-term viability of the shareholders’ wealth.