ESG and profitability: the case of financial institutions

International standard setters, policy makers and institutional investors have progressively intensified their focus on Corporate Social Responsibility (CSR) and Environmental Social Governance (ESG) factors (Friede et al., 2015; Brooks & Oikonomou, 2018), pointing out their importance for companies’ long-term value creation. At the same time, there has been an exponential increase in the implementation of CSR practices and ESG disclosure by companies worldwide, based on the idea that “doing good is good for business”. Recently the European Commission placed CSR – aimed at companies, also via Non-financial disclosure (NFD) requirements for large companies - and ESG – targeted to investors and financial institutions - at the heart of its policies, aimed at more sustainable path for growth. There has been a sharp increase in implementation of CSR practices worldwide (Vartiak, 2016), as companies have been encouraged to behave in a socially responsible manner on a wide range of issues (Engle, 2007). In line with these recent changes, academic studies also began to turn their attention to the level of ESG practices implemented by firms. Indeed, from an academic perspective, the relationship between Environmental Social Governance (ESG) and performance has been deeply investigated in the literature in the last four decades. It is perceived as a particular topic of the instrumental stakeholder theory (Donaldson and Preston, 1995; Waddock and Graves, 1997) and the resource- based view of the firm (Korschun et al., 2014).