1
Experience level: 
Intermediate
Intended Audience: 
Faculty
Authors: 
Niranjan Chipalkatti- chipalka@seattleu.edu, Asha Prasuna- ashasivakumar@somaiya.edu, Meenakshi Rishi- rishim@seattleu.edu, SNV Sivakumar – sivakumar@somaiya

ESG DISCLOSURE SCORE IRRELEVANCE OR MARKET INDIFFERENCE: THE CASE OF INDIAN BANKS

Environmental, social and governance (ESG) issues are becoming increasingly salient topics within the banking industry as banks adjust their lending, investment, and risk assessment processes to deal with increasing societal and regulatory scrutiny. Globally, a rising number of loans are being restructured to link them to a borrower's ESG performance. ESG scores are designed to support banks and financial institutions to measure and monitor inherent ESG risks across their financial exposure. These scores have an impact on banks’ net income margin, risk profile and liquidity. The Basel Committee on Banking Supervision of the Banks of Internal Settlement (BIS) highlights a paucity of research that examines the impact of such adaptations on bank profitability. our paper examines the association between ESG disclosures and financial outcomes of banks in the context of a fast-growing emerging economy. In India, banks have begun to reassess loans to fossil fuel -intensive sectors amid growing pressure from the Reserve Bank of India (RBI) and international investors to mitigate against transition risks and adhere to global ESG standards. We examine the association between bank ESG disclosures and bank financial performance, credit risk and market risk metrics. Our empirical investigation will focus on a panel of 29 Indian banks (both public and private sector) over 2013 to 2023. Econometric results indicate that there is no association between ESG, and its component disclosures scores and bank profitability as measured by bank return on equity (ROE). While higher ESG aggregate scores are associated with higher returns volatility- a measure of market risk, we observe no association between the ESG component scores and market risk. Similarly, we observe no association between aggregate ESG score and the cost of funds of a bank. However, when we disaggregate ESG scores, we observe that a higher score in the Governance (G) component is associated with lower cost of funds. Also, higher scores in the Social (S) component are correlated with a marginally significant reduction in the cost of funds. A higher ESG score is associated with higher credit risk measured by non-performing assets (NPAs). However, there is no association between the E, S, and G component scores individually and credit risk. The findings of this study can have significant implications for global investors. For such investors, it is worthwhile to consider the impact of higher scores on the Governance and Social dimensions on bank cost of funds. Banks with lower market risk benefit from lower cost of funds. From a policymaking perspective, the RBI is on the right track as it nudges banks toward recognizing and disclosing ESG parameters on their books. Finally, the results indicate that more disclosure of emission related financing should be encouraged.