How do ESG practices influence systemic risk and financial performance in U.S. and European banks? : a comparative analysis

Abstract

This thesis investigates and compares the joint and separate effects of Environmental (E), Social (S), and Governance (G) scores on Financial Performance and Systemic Risk in the banking sector, through a comparative analysis of 53 European and 53 U.S. banks over the period 2017 – 2023.

Using fixed-effects panel regressions and a two-stage modeling framework, the analysis tests whether ESG engagement is associated with improved profitability – first measured by Tobin’s Q and later on by Return on Assets (ROA) – and reduced systemic risk – measured by SRISK%.

The findings reveal regionally asymmetric outcomes: ESG performance is linked to marginally higher ROA in U.S. banks and slightly negative effects in European banks. However, across both regions, effect sizes are extremely small, suggesting limited economic significance despite statistical significance. Moreover, higher ESG scores are positively associated with the likelihood of systemic risk classification, and no significant relationship is found with the intensity of systemic risk once it materializes. These results indicate that while ESG practices are increasingly embedded in banking strategies, their financial and stability-related benefits remain minimal and highly context-dependent.