ESG Metrics: Exploring their Role in Predicting Systemic Risks in the European Financial System

Sammanfattning

The study aims to explore the relationship between European financial banks' ESG pillars and their contribution to systemic risk, with a focus on the Eurozone banking industry. Utilizing the €ΔCoVaR metric to capture systemic risk, we analyzed a sample of 35 publicly listed banks across 12 European Union countries for the period of 2019 to 2023. The methodology consists of three steps. The first step is estimating VaR for each bank using the Basic Historical Simulation method. The VaR results will allow for the computation of CoVaR, ΔCoVaR, and €ΔCoVar. The last step is to analyze the relationship between ESG and €∆CoVaR. Our primary hypothesis (H0) posited that banks with higher ESG would contribute less to systemic risk; however, our findings indicate a positive correlation, diverging from pre-pandemic studies which generally reported a negative link. Our secondary hypothesis (H1) examined the distinct impacts of individual ESG pillars on systemic risk, revealing that while the environmental and social pillars have positive impact on systemic risk, the governance pillar shows a comparatively weaker association with systemic risk.