Does the environmental impact of banks affect their financial performance?

Abstract

Abstract We study empirically the environmental impact of banks, i.e. the negative externality on the environment and the society deriving from the use of a natural resource or the emission of a pollutant. We find that environmental “impact ratios”, i.e. environmental damage costs in proportion to total revenues, are negatively correlated with bank profitability. Furthermore, banks with a stronger impact on the environment are valued less by equity market investors and pay less cash to share- holders. Among environmental categories, potential damages from greenhouse gas emissions or waste seem to be especially severe. We deliver important insights for banks´ environmental management. If bankers would be able to address businesses and practices to be more renewable and lower in their emissions, they could im- prove both the operating as well as the market performance. Thus, firms would be financially more stable, and could react smoothly to the recent introduction of stricter and onerous environmental regulations.