ESG assets under management and bank profitability

Abstract

This thesis aims to understand the influence of the sustainability focus of 40 large EU bank’s operating activities on its profitability. As providers of capital and intermediary in the allocation of financial means, banks are central in the EU’s strategy to increase sustainable finance and becoming carbon neutral. Using both a System Generalized Method of Moments (GMM) estimation technique and a Structural Equation Model, the following research question was assessed: How does the ESG Assets under Management ratio of systemically important banks in the EU influence their profitability? Controlling for commonly used bank-specific and macroeconomic factors determining the profitability of banks, a negative impact of the ESG Assets under Management as a percentage of total assets on the Net Interest Margin was found, however, no significant impact on neither the Return on Average Assets nor the Return on Average Equity was detected. The relation found is only valid in the short-run and becomes insignificant once it is extrapolated to the longer term. The results should be understood as a starting point for further research in this area of sustainable banking in particular due to relatively fragile GMM specifications and the short time period of the sample. A renewed assessment with the mandatory, detailed Principal Adverse Impact (PAI) statements of the Sustainable Finance Disclosure Regulation is recommended and will shed new light on sustainable banking beyond ESG scores.

Date of Award	19 Oct 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Geraldo Cerqueiro (Supervisor)