ESG controversies and bank risk taking

Abstract This study investigates how environmental, social, and governance controversies affect bank risk taking. By estimating a dynamic panel data model from 2011 to 2020, we find evidence that banks with fewer ESG controversies take less risk. Banks with a lower number of ESG controversies show their compliance with the implementation of ESG strategies to reduce risk, as evidenced by lower risk‐weighted assets and higher Z ‐scores. The present study supports the recent guidelines on climate‐related and environmental risks published by the Basel Committee on Banking Supervision and the European Central Bank. Therefore, the main results strengthen the need for the integration not only of social and governance risks but also of climate‐related and environmental risks in banks' risk management framework.