CSR in the banking industry: A longitudinal analysis of the impact on financial performance and risk-taking

Building on the stakeholder influence capacity theory we propose a non-linear relationship between CSR investments and financial performance and between CSR investments and risk-taking behavior in financial firms. We study the impact of ESG scores on both the financial performance and risk-propensity of European banks using panel data from 2005 to 2022. Given the role of Swiss banks as frontrunners regarding the implementation of CSR-related regulations in the financial industry, we also shed light on the Swiss case. Controlling for bank and time fixed effects we confirm a U-shaped relationship between ESG and financial performance, and an inverted Ushaped relationship between ESG and risk for Swiss banks. Remarkably, we find no relationship between CSR initiatives and financial performance for European banks and find a direct negative effect of CSR on risk density. These results indicate the need to consider institutional differences in the CSR debate. Moreover, we show that promoting ESG initiatives in the financial industry might lead to adverse effects (i.e. lower financial performance and higher risk) if banks do not commit sufficiently to those CSR investments.