How do banks' ESG sustainability challenges affect their default risk?. A Review after the COVID-19 crisis

The vulnerability of the banking sector during the 2007-2008 crisis was widely believed to have been caused by excessive risk accumulation. Then the COVID-19 pandemic triggered a sudden and unexpected turn in the outlook for the functioning of the economy. Such a change could not have been without an impact on the banking sector, which is inextricably linked to the real sphere, as it maintains the accounts of households and businesses and provides them with credit. Additionally, ESG reporting issues are beginning to play an increasingly important role in investment processes and decisions. Banks must report on their environmental, social, and corporate governance activities, but, on the other hand, they require the same from their counterparts who received credit support. This raises the important question of what impact it has on the risk taken by banks.

The purpose of the study is to verify the importance of ESG activities for bank default risk. Using the panel regression methodology, the research sample based on 303 commercial banks around the world during the period 2012 to 2021. In addition, the study highlights the post-financial and pandemic crises, taking into account the reforms introduced since then to improve corporate governance of banks.