Asia’s Banking Sector: the Impact of ESG on Financial Stability and Value

Studies on the Asian banking sector are quite few, mainly considering the banking sector in the context of the European and American economy, and they touch upon the relationship between the performance indicators of banks with the application of sustainable development practices and the inclusion of ESG agenda in their strategy (link to article). As a rule, the relationship of such indicators of bank performance as ROA, ROE, Tobin's Q (quite rarely Stock price (Market return)) with ESG Score is considered, the results of studies mostly show that this relationship is observed, but there are also studies (link to article) that show the lack of relationship or negative relationship. This study will attempt to analyze whether there is a relationship between the indicators that can be markers of sustainability of banks with their adoption of sustainability practices. Specifically, we investigate the existence of a relationship between the indicators reflecting the application of sustainable development practices by banks in the field of environment, social and governance (ESG Score) with indicators that are rarely considered in studies, such as value-based indicators TSR (Total Shareholders Return) calculated according to three methods: Traditional, BCG (Boston Consulting Group) methodology, Morgan Stanley methodology, and, with BCrG(Bloomberg Credit Grade) indicator, which has a similar nature to credit rating, but is calculated using a different methodology based on The Bloomberg Corporate Default Risk Model (DRSK). Three aspects were addressed in the paper: 1) the existence of a relationship in the sample as a whole, 2) the existence of a relationship between lag variables reflecting the use of sustainability practices and dependent variables, 3) the existence of a positive impact of the use of sustainability practices during crises. The following conclusions were drawn from the results of the study. For value-based indicators, the method of calculation is of great importance; in the case of the first indicator, no relationship between the variables was found. The second two methodologies showed identical results and only those reflecting overall ESG inclusion and the presence of high values in the Governance score were confirmed as significant variables affecting the dependent variables. Lag variables did not show any significance for the dependent variables. As in the case of the crisis period, only the ESG Score in the pre-crisis period was significant. The model with BCrG default score in the first dimension showed significance in all 3 ESG dimensions, in the second dimension only the lag variable ESG in general and Governance score were significant, in the third dimension the significance of sustainability indicators in crisis periods for BCrG score was not detected.