The Relationship between ESG Scores and Firm-Specific Risk of Eurozone Banks

This paper investigates the relationship between corporate social responsibility and the idiosyncratic risk of Eurozone banks. Idiosyncratic risk represents firm-specific risks for banks, and the Carhart four-factor model is used for 31 Eurozone banks from 2002 to 2019 to determine the idiosyncratic risk. Thomson Reuters ESG scores are used to determine the ESG scores of these banks during the same period, and the effects of the environmental, social, and governance dimensions are investigated separately. The quantile regression method reveals a relationship between ESG and idiosyncratic risk over different risk levels. A significant negative relationship has been found between the overall ESG scores and the idiosyncratic risk of banks for medium- to high-risk levels. The effect becomes stronger as the riskiness of the banks increases. Similar to the overall ESG score, the governance and environmental dimensions have a negative impact on banks with medium- to high-risk levels. No significant relationship could be identified between the social dimension and the idiosyncratic risk of banks.