N°24-39: Understanding Reputational Risks: The Impact of ESG Events on European Banks

This study examines the financial impact of Corporate Social Irresponsibility (CSI) events on European banks. Exploiting a dataset of 11,832 reputational shocks from 2007 through 2023, we find evidence of significant negative abnormal stock returns and increased volatility following CSI media coverage. High-severity media coverage, as well as the reporting of previously unknown problems, increases the magnitude of the shock. We complement the main analysis with a rich dataset of bank characteristics to explain variations in the results, finding that proactive ESG engagement buffers against reputational risks. European banks with higher deposit instability exhibit especially negative short-term returns, reflecting the interconnections between investor and depositor behaviour. Changes in total deposits that coincide with negative CSI news magnify the effect on stock prices and volatility. A range of placebo testing procedures are employed to demonstrate that these effects are specific to the bank-level CSI events in our data and not caused by general market noise. The findings underscore the importance of ESG risk management strategies in foreseeing and mitigating adverse reactions from investors and depositors.