Work

ESG relevance in credit risk of development banks

Year: 2025

Type: article

Abstract: This paper investigates relevance of Environmental, Social, and Governance (ESG) risks in the context of banks' credit risk. Focusing on a global sample of 567 banks, including 40 development banks, we aim to discern nuances in ESG relevance scores between different bank types. Our findings highlight distinct differences between national and multilateral development banks, with ESG risk significantly influencing credit risk in the latter. Notably, social and governance factors play pivotal roles in shaping credit profiles. Development banks, at the forefront of promoting good ESG practices, face heightened exposure and risks. This paper contributes to the understanding of the evolving dynamics of ESG impact on creditworthiness. • We explain differences in risk-based ESG relevance scores between development and conventional banks. • Social and governance factors are more relevant than environmental factors on banks' credit risk. • Environmental risks are relatively insignificant at the individual bank level but may be relevant at the sectoral level. • Multilateral development banks face higher ESG risks, particularly in governance. • ESG risks are significantly less relevant for national development banks in comparison to multilateral development banks.

Source: Research in International Business and Finance

DOI: 10.1016/j.ribaf.2025.102831

Authors: Jan Porenta, Vasja Rant

Institution: University of Ljubljana

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,820

Funder: Javna Agencija za Raziskovalno Dejavnost RS