Understanding reputational risks: The impact of ESG events on European banks

Abstract

This study examines the financial impact of negative ESG 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 negative 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. Furthermore, we find that deposit instability exacerbates these effects, such that banks with more volatile deposit bases suffer more pronounced stock price declines following ESG incidents, indicating that investors perceive them as more vulnerable to sudden changes in sentiment. However, banks with stronger ex-ante ESG engagement experience less deposit volatility and more muted market responses, which highlights the role of ESG practices in mitigating reputational risk. A range of placebo testing procedures are employed to demonstrate that these effects are specific to the bank-level ESG events in our data and not caused by general market movements. Our findings highlight the interconnection between ESG risk, investor and depositor reactions, and the protective value of sustained ESG engagement.