Essays in environmental, social, and governance performances in finance

The role of the financial industry in ESG issues cannot be overstated. This industry serves in an enabler capacity through the capital allocations (and other support services) to companies that are directly involved in activities with negative environmental and social externalities. However, the ESG performance of financial companies remains under-explored in academic literature. Additionally, the capital market appears to misprice environmental performance as cost of these performances are broadly considered social in nature. Understanding the ESG performance of companies in the financial industry and the relevance of such performance can help guide policies that encourage sustainable financing (investment).

My dissertation examines the importance of ESG performance of financial companies in two ways: first to investors and second to the financial companies themselves and find that both investors and financial companies respond positively to strong ESG performance. Financial companies are mindful of the ESG performance of theirs and their borrowers when they participate in loan syndication. Next, the recent spikes in social unrests with non-trivial cost consequences to businesses, begs the question concerning behavior of banks during these periods. If episodes of social unrest serve to increase business operational risks, especially for small businesses, then banks are more likely to reduce their lending to businesses in areas most affected. But, more importantly, do banks put their resources where their taglines are? If banks have strong social performance, then in periods of negative social shock, such performance should be more valuable. I provide evidence that negative social shock has negative impact of bank lending. Yet, social performance serves to minimize the impact.

Finally, my thesis questions how sustainability is measured in literature and public policy. Measuring sustainability by environmental performances (such as quantity of emissions, disclosures, environmental scores, etc.) does not really serve the actual substance of sustainability. Rather, the dollar impact of environmental activities is a better measurement of sustainability. Using such a measure, I provide evidence consistent with market mispricing of sustainability. Particularly, both firm value and investor holdings decline with an increase in the dollar cost of environmental damage. Quantifying environmental activities in monetary terms is more meaningful. No wonder the US Congress is considering a carbon tax that will serve as the first step towards getting companies to internalize the cost of their environmental activities.