Sustainability May Cost the Earth: Examining the Strategic and Financial Consequences of Banks' Sustainable Corporate Strategy

Abstract

Recently many companies have begun adopting a sustainable framework, particularly large firms with strong customer bases such as banks. Despite this interest, sustainability's contribution to value remains elusive.

Based on definitions in the literature, banks evidence a commitment to corporate sustainability when they sign the Equator Principles that require them to enforce best environmental and social practices in projects they finance. A sample of international banks (N=84) was developed comprising all listed signatories to the Principles and matched non-signatories; financial and operating data were compiled from Bankscope.

Cross-sectional analysis shows that signatories have a different mix of risks and strategies; have significantly lower profit margin and price-to-book ratio than non-signatories; and did not add value for shareholders over the recent medium term. Favoring sustainability - at least by banks signing the Equator Principles - does not add value as suggested by many proponents; and it actually worsens financial performance against several criteria.

Keywords: bank performance, corporate decision making, Equator Principles, sustainability

JEL Classification: M14