This paper investigates the impact of environmental, social, and governance ESGperformance on liquidity risk.. The liquidity risk played a significant role in the 2007-2008 global financ
INTRODUCTTION 5+ 5sn St + HE HH HH HH1 1 11.11 111111111111111111111711eTkrrk 7
Research Objectives and Questions - - G1 x1 TT TT HH Hà HH HH HH 9
This study enhances the existing literature by examining the correlation between ESG (Environment, Social, and Governance) scores and liquidity risk in banks, focusing on income levels The relationship between ESG factors and liquidity risk is a critical area of research in finance and banking, as ESG considerations increasingly influence investment and financial decisions Furthermore, liquidity risk poses substantial threats to banking operations, potentially jeopardizing the overall stability and performance of financial institutions.
Evaluating the impact of ESG (Environmental, Social, and Governance) factors on liquidity risk in banks globally is crucial for bank managers This understanding will enable them to make informed decisions that promote the bank's sustainability and resilience in the future.
Research Scopes and MethodoèlOgBẽ6@S - ¿+ 11T TT TT TH TH TH TH Tàn nh 10
This study analyzes data from 740 banks across 70 countries between 2003 and 2022, utilizing the fixed-effect method to explore the relationship between ESG scores and liquidity risk Following the United Nations Global Compact's introduction of ESG in June 2004, which encouraged businesses to prioritize these factors alongside their core objectives, the research reveals that higher ESG scores are significantly linked to reduced liquidity risk The analysis is based on 14,800 bank-year observations from the Refinitiv database and employs two measures to capture liquidity risk ratios.
This study enhances the existing literature by exploring the influence of Environmental, Social, and Governance (ESG) factors on risk management, particularly in the banking sector It highlights how ESG practices can improve risk management, minimize financial losses, and bolster overall financial stability While prior research has established the relationship between higher ESG scores and reduced credit risk (Henisz and McGlinch, 2019), operational risk (Galletta et al., 2022), and market risk (Sassen et al., 2016), there remains a gap in understanding the effect of ESG on liquidity risk.
This study evaluates the value of ESG (Environmental, Social, and Governance) factors in banking, focusing on their impact on liquidity risk By analyzing the three pillars, it finds that banks with higher environmental scores are better equipped to manage risks related to climate change, which can affect their financial performance Furthermore, banks that prioritize social factors, such as worker health and safety, are likely to experience fewer disruptions impacting liquidity Lastly, those with strong governance practices, including transparent financial reporting and effective risk management, are less prone to financial reporting issues.
This study analyzes panel data based on countries' income levels to evaluate the impact of Environmental, Social, and Governance (ESG) factors on bank liquidity risk The findings indicate that only advanced economies effectively mitigate liquidity risk, while banks headquartered in emerging economies show no significant relationship with liquidity risk Additionally, low-income developing countries often neglect ESG considerations in their investment and business practices To reinforce the results, robustness tests were conducted, confirming the relationship between ESG and liquidity risk through various methods, including the absence of fixed effects, alternative liquidity risk measurements, different clustering approaches, and additional macroeconomic data such as GDP growth and labor force statistics.
Policymakers can enhance their strategies by understanding how ESG factors influence bank risk management, enabling the development of effective policies that foster sustainable economic growth tailored to various income levels This study underscores the necessity of integrating ESG considerations into bank risk management decisions and emphasizes the importance of creating ESG scores that harmonize environmental, social, and governance goals with economic development.
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This study is structured as follows: Chapter 1 introduces the study's topic and objectives, while Chapter 2 reviews relevant literature and formulates hypotheses regarding the influence of ESG on liquidity risk Chapter 3 outlines the research methodology, detailing data collection, analysis, and study design In Chapter 4, the main findings are presented along with robustness tests and additional analyses related to the impact of ESG scores on the liquidity risk of banks Finally, Chapter 5 concludes the study and discusses implications for future development, followed by a comprehensive list of references.
Institutional background oo ec cece cece xSx k1 11 E1 111 TT HT HT TT HH HT TH Hành 12
Interest in the impact of business activities on social well-being is on the rise, with ESG (Environmental, Social, and Governance) and Corporate Social Responsibility (CSR) becoming key concepts in corporate behavior This increased focus is driven by growing customer demand and regulatory pressures, highlighting the importance of responsible business practices in today's market.
In 2023, companies are increasingly focusing on integrating ESG (Environmental, Social, and Governance) and CSR (Corporate Social Responsibility) into their operations to enhance their reputation and gain a competitive advantage The significant interest from investors is evident, as 300 mutual funds with ESG mandates attracted a remarkable $20 billion in new assets in 2019, marking a fourfold increase from 2018 (Gillan et al., 2021) Additionally, there is mounting pressure from stakeholders for businesses to implement sustainable practices, minimize negative societal and environmental impacts, and provide comprehensive sustainability disclosures (Eliwa et al., 2019).
ESG incorporation is becoming more popular thought to improve a managed portfolio's performance by boosting returns and lowering portfolio risk (Broadstock et al.,
2020) Additionally, firm’s performance on ESG measures is thought to be a crucial indicator of their capacity to create value and carry out successful business strategies (Apergis et al.,
2022) The mainstream interest among asset managers in ESG investing has increased In the largest markets in 2019, ESG focused portfolio capitalization exceeded US$30 trillion
ESG investing has become increasingly significant for investors, driven by a growing emphasis on ethical investment behaviors Over the past decade, it has attracted attention not only from customers but also from employees, public interest groups, and government regulators ESG, which stands for environmental, social, and governance factors, reflects how corporations and investors incorporate these concerns into their business models In response to the UN Sustainable Development Goals (SDGs) and heightened investor focus, more US corporations are actively assessing, disclosing, and managing sustainability risks and opportunities.
The ESG framework includes three pillars: environmental, social, and governance (Sassen et al., 2016) Environmental factors take into account an organization's overall
The environmental impact of organizations encompasses various factors, including their carbon footprint, the use of toxic chemicals, and sustainability initiatives within the supply chain, highlighting the significance of addressing climate change and conserving natural resources The social pillar evaluates an organization's contributions to society, focusing on hiring practices, workforce diversity, gender equality, and efforts to promote social justice beyond business interests Lastly, the governance pillar assesses the influence of a company's management and board on transformation, emphasizing executive compensation, leadership diversity, and shareholder engagement.
Companies utilize ESG scores to assess their performance in environmental, social, and governance aspects Refinitiv's ESG Scores provide a transparent and objective evaluation of a company's commitment and effectiveness across ten key themes, including emissions and human rights, using publicly available data These category scores are consolidated into three main pillars: corporate governance, social responsibility, and environmental impact The ESG pillar score reflects a relative total based on industry-specific weights for environmental and social factors, while governance weights remain consistent across all sectors, normalized to a percentage scale from 0 to 100.
Higher E scores reflect a company's effectiveness in environmental management, including certifications, water conservation, energy efficiency, and waste reduction, ultimately leading to reduced long-term environmental hazards Strong S scores demonstrate success in managing social issues, community engagement, employee benefits, and supply chain management, indicating a commitment to retaining employees during crises rather than resorting to layoffs Additionally, achieving a high G score for banks requires adherence to robust governance practices.
To ensure a company's overall financial stability, it is essential to excel in key areas including policy adherence, foreign tax compliance, board diversity, auditor independence, whistleblower protections, and effective management of governance-related incidents Demonstrating strong performance in these aspects is crucial for fostering a robust corporate governance framework.
Clear ESG performance and robust policies enable firms to mitigate risks associated with environmental litigation, labor unrest, and shareholder conflicts, ultimately protecting their reputation and financial health (Bissoondoyal-Bheenick et al., 2023) Companies neglecting environmental risk management face potential legal repercussions and reputational harm, while inadequate labor practices can lead to high employee turnover and reduced productivity Furthermore, organizations with poor governance are more susceptible to issues like fraud and shareholder discontent By integrating ESG factors into risk management and investment strategies, companies can alleviate these risks Additionally, sustainability funds often yield returns comparable to or exceeding traditional funds, supporting investment research and management Emphasizing ESG also aids in attracting and retaining motivated employees, enhancing overall productivity Consequently, incorporating ESG principles can lead to significant reductions in operating and energy costs over time.
Investing and conducting business in alignment with ESG standards has been shown to yield positive financial returns and social benefits According to the Global Sustainable Investment Alliance (2022), global sustainable investments have surged from USD 13.3 trillion in 2012 to USD 35.3 trillion, highlighting the growing significance of responsible investment practices.
In 2020, ESG assets under management experienced significant growth, projected to reach $30 trillion in 2019, $35 trillion in 2020, and over $50 trillion by 2025, representing more than 15% annual growth These assets constitute over a third of the expected $140.5 trillion total (Apergis et al., 2022) Additionally, the ESG issues prioritized by banks tend to vary based on the income levels of the countries in which they operate, with research by Andries and Sprincean et al (2023) indicating that only large banks are involved in this prioritization.
14 and those from advanced countries benefit from transparency on the dissemination of ESG information.
Businesses that fail to consistently prioritize ESG or treat it as a mere branding tool are unlikely to thrive For example, companies engaging in "greenwashing," or misleading claims about their environmental practices, risk customer backlash that can harm both revenue and stock value Additionally, focusing on ESG does not guarantee strong stock performance, as market fluctuations, industry trends, and broader economic conditions can adversely affect the success of both companies and ESG funds.
In the banking industry, the integration of ESG factors into risk management, lending, and investment decisions is becoming crucial (Li et al., 2022) By adopting ESG frameworks, banks can effectively identify and mitigate risks while seizing opportunities for sustainable and ethical practices This approach not only enhances risk mitigation strategies but also provides a comprehensive understanding of potential threats Banks that prioritize ESG considerations are often viewed favorably by customers, employees, and investors, reducing reputational risks associated with negative ESG events Demonstrating a commitment to sustainability and social responsibility can attract new customers and partners Ultimately, incorporating ESG into risk management helps banks lower risks, improve their reputation, and meet stakeholder expectations, leading to long-term value creation.
Risk management is crucial not only for the banking industry but also for its stability, given the severe financial and economic consequences of bank failures Banks face multiple risks, including credit, liquidity, interest rate, and operational risks (Ben Abdesslem et al., 2022) The effectiveness of risk management strategies has come under scrutiny following the 2007 financial crisis (Azmi et al., 2021), highlighting the ongoing challenge of protecting against financial instability.
15 has become even more important after the global financial crisis of 2007-2008, which resulted in significant losses around the globe (Mamatzakis & Bermpei, 2014).
The collapse of Silicon Valley Bank marks the largest bank failure in the United States since the global financial crisis, primarily due to its high proportion of uninsured deposits and investments in hold-to-maturity securities This incident, alongside the 2008 failure of Lehman Brothers, underscores the critical need for effective liquidity risk management in banking During the financial crisis, many banks faced liquidity issues as the interbank lending market froze, leading to numerous high-profile failures and necessitating substantial government intervention to avert a broader financial disaster Liquidity risk refers to the potential inability of a business or individual to meet financial obligations when due, often arising from an inability to quickly convert investments into cash without impacting their market value Consequently, financial institutions must adhere to stringent compliance standards and undergo stress tests to evaluate their financial stability.
As while creating liquidity is a fundamental role of banks, Diamond and Dybvig
Liquidity risk poses a significant threat to financial institutions, as evidenced by the 2007-2009 crisis It can arise from market fluctuations, unexpected cash flow changes, or unforeseen events necessitating large payments To mitigate this risk, banks maintain adequate liquid assets like cash and government securities, which can be quickly liquidated or used as collateral during stressful periods Additionally, they utilize various funding sources, including deposits, interbank borrowing, and central bank access, to ensure sufficient liquidity Given their heavy reliance on borrowed funds, financial institutions are often scrutinized for their ability to meet debt obligations without incurring substantial losses.
Theoretical framework and developing hypotheSiS - - 6 cà St HH HH gi, 20
Research indicates that a company's focus on stakeholder orientation correlates with improved ESG performance, leading to higher profitability and enhanced employee and consumer satisfaction Furthermore, studies show that banks demonstrating strong performance across all three ESG evaluation pillars tend to experience a reduction in non-performing loan ratios.
Stakeholder theory posits that low financial risk correlates with high levels of corporate social performance (CSP) by emphasizing the interests of all stakeholders (Sassen et al., 2016) By prioritizing sustainable investments, companies can enhance their reputation and build trust among customers and stakeholders, ultimately mitigating risks The theory advocates for the creation of long-term value for all stakeholders instead of solely focusing on maximizing shareholder profits Consequently, firms can cultivate sustainable competitive advantages, strengthen relationships with stakeholders, and enhance their reputation and commitment to social responsibility.
Sustainability theory advocates for organizations to proactively address ESG-related risks, such as reducing greenhouse gas emissions and enhancing water efficiency, which bolsters long-term resilience By fostering transparency and accountability, organizations can mitigate reputational risks and strengthen stakeholder trust through improved ESG reporting, enabling informed decision-making for investors Moreover, banks that emphasize ESG factors can achieve greater operational efficiency by minimizing energy consumption and waste, ultimately lowering costs and boosting profitability Investing in technology for better ESG reporting also streamlines compliance, reducing associated costs and complexities.
Higher ESG scores are linked to lower default risk due to enhanced profitability and decreased performance variability and cost of debt Additionally, banks with elevated ESG scores typically exhibit lower risk profiles.
Companies with strong ESG performance benefit from improved risk management, enhanced customer engagement, lower financing costs, and greater operational efficiency This positive perception from investors and stakeholders can facilitate better access to finance and mitigate risk management challenges Conversely, banks facing high default risks may lose creditor and investor confidence, leading to potential liquidity crises as they may need to quickly liquidate assets to cover losses from bad loans Therefore, integrating ESG factors can significantly reduce default risk by providing insights into a company's long-term viability and promoting sustainable practices that bolster risk management and value creation over time.
For this reason, higher ESG scores is likely to decrease liquidity risk by improving risk management, strengthening customer engagement, increasing bank performance. Therefore, this study hypothesizes as follows:
H1: Higher ESG scores will constrain liquidity risk global banks
RESEARCH METHODOLOGY 0 csssssssssssssessssseeessntescsnseecsnseessnseesssneesssneesssnesssnseessanesssaneessaneessanensanness 22
Sample and data cece
This research analyzes a cross-national sample of publicly listed banks sourced from the Refinitiv database, covering the period from 2003 to 2022 In June 2004, the United Nations Global Compact introduced the concept of Environmental, Social, and Governance (ESG) criteria, urging companies to integrate these considerations alongside their primary economic objectives The final sample encompasses
14800 bank-year observations of 740 listed banks over a 20-year period from 70 countries. Financial variables and data for ESG combined score are retrieved from Refinitiv.
Refinitiv, a key business within the London Stock Exchange Group (LSEG), is a leading global provider of financial markets data and infrastructure By integrating a unique open platform with top-tier data and expertise, Refinitiv empowers clients and partners to drive performance, innovation, and growth The company leverages cleaner and more accessible data to enhance the use of advanced technologies such as AI and machine learning, enabling customers to gain insights, accelerate innovation, and adeptly navigate a rapidly changing landscape With $6.25 billion in revenue, Refinitiv serves over 40,000 customers and 400,000 end users across 190 countries, solidifying its role in the global financial market.
ESG scores serve as a valuable tool for stakeholders to evaluate a company's performance across key environmental, social, and governance pillars, similar to how credit ratings assess creditworthiness Various rating organizations provide ESG data, enabling investors to gauge a firm's ESG performance effectively Refinitiv's ESG Scores offer a transparent and objective assessment of a company's commitment and effectiveness across ten critical themes, including emissions, environmental product innovation, and human rights, using publicly reported data This information is sourced from publicly available materials such as company websites, annual reports, and corporate social responsibility reports, which are then audited and standardized for accuracy.
This paper estimates the impact of the ESG scores on liquidity risk of listed banks using a fixed effect model in a cross-country setting.
Liquidity risk, represented by the equation œ + B,ESG scores + ỉ,Control + FixedEffects + ộ&z, serves as the dependent variable, indicating a bank's liquidity risk in a specific year Following established practices in banking literature (Saif-Alyousfi et al., 2023; Sufiullah and Shamsuddin, 2017), this study measures liquidity risk as the ratio of total deposits to total assets Utilizing this metric allows for an assessment of the bank's risk management capabilities, particularly in relation to potential unintended deposit withdrawals.
Measurement of main variables - -ó- 6 s11 HH HH ch Thọ Tu TH HH Hà Hà HH gh 23
ESG scores are crucial metrics that evaluate the sustainability performance of banks, encompassing environmental, social, and governance aspects A higher ESG score signifies superior sustainability efforts, with the overall score derived from three key pillars: corporate governance, social responsibility, and environmental impact These pillar scores reflect industry-specific weights for environmental and social categories, while governance weights remain consistent across all sectors The pillar weights are expressed as percentages, ranging from 0 to 100, providing a clear framework for assessing a bank's commitment to sustainable practices.
Liquidity risk, defined as the ratio of total deposits to total assets, serves as a crucial indicator of bank performance, as highlighted by Saif-Alyousfi et al (2023) and Djalilov and Piesse (2016) A lower liquidity risk ratio suggests that bank management is adopting a more aggressive strategy, potentially leading to increased exposure to risks associated with environmental, social, and governance (ESG) issues.
This study analyzes the impact of various country and bank-specific characteristics on bank liquidity, incorporating control variables consistent with previous research (Cittero and King, 2022; Imbierowicz and Rauch, 2013; Azmi et al., 2020) It includes the equity to total assets ratio as a measure of bank capitalization, indicating that banks with higher capital ratios are generally considered safer and less risky (Saif-Alyousfi et al., 2020) Additionally, bank profitability is assessed through net income relative to total equity, while bank efficiency is evaluated by the ratio of total operating expenses to total operating profit before non-recurring income (Galletta et al., 2022), with a lower ratio indicating greater efficiency.
The efficiency of a bank can be assessed through various financial ratios One key metric is the non-interest income ratio (Nior), which measures the proportion of income derived from fees and commissions related to services like account maintenance and wealth management A high Nior may suggest that a bank is engaging in riskier, fee-generating activities such as trading Another important ratio is the total loans to total assets ratio (T/ta), where a higher value indicates increased risk exposure for the bank Table 1 presents the main variables utilized in this research.
Liquidity risk The ratio of total deposit to total asset Refinitiv
ESG scores Overall score based on the environmental score, social Refinitiv score and governance score of banks Refinitiv
Capital The ratio of total equity to total asset
Profit The ratio of net income to total equity Refinitiv
Efficiency Total operating expenses to total operating profit before Refinitiv non-recurring income A lower ratio means that the bank is more efficient
Nior The ratio of non-interest income to revenues Refinitiv
Tita The ratio of total loans to total assets Refinitiv
EMPIRICAL RESULTS 5-52 SS++éESE+xEE E1 HH HH H1 111k krrii 25 Ly) /31ri i91 6
Additional analysis 8n nh cece cece cece ẻẻẦẦẦẦ
This study uses the three different components of ESG score - (E), (S), (G) pillars from Refinitiv to identify which is the most influential driver of liquidity risk following Brogi et al.,
A study conducted by Apergis and Poufina (2022) and Bilyay-Erdogan et al (2023) investigates the relationship between bank liquidity risk and Environmental, Social, and Governance (ESG) scores The research employs regression analysis on the individual components of ESG pillars, with findings detailed in Table 4.5, highlighting the correlation between these ESG components and liquidity risk.
Table 4.5 Additional Analysis: Decomposition analysis
Year FEs YES YES YES
R-squared 0.585 0.577 0.553 Note: The Liquidity risk is a dependent variable measured by total deposit to total assets This table examines the E, S, G pillars affect liquidity risk by using fixed effects model Column (1) shows the result of the year-fixed to test for Environment Column (2) reports the result of the year-fixed effect for Social.
Column (3) presents the findings from a year-fixed effects analysis focused on Governance, with standard errors clustered at the bank-year level The regression coefficients are marked with significance indicators: ***, **, and * signify significance at the 1%, 5%, and 10% levels, respectively.
Columns (1) to (3) show the results by regression bank’s liquidity risk on three ESG dimension pillars score separately All of the pillars reduce that associated bank’s liquidity
Table 6 reveals that environmental, social, and governance (ESG) factors significantly and negatively affect liquidity risk at the 1% level Additionally, Sassen et al (2016) indicate that social performance adversely impacts systematic, idiosyncratic, and total risk, while environmental performance reduces idiosyncratic risk In contrast, governance performance does not significantly influence firm risk.
On the other hand, banks that prioritize ESG factors are more likely to have a stronger risk management framework in place, which can help mitigate potential risks (Atif and Ali.,
Incorporating environmental, social, and governance (ESG) factors into lending practices allows banks to minimize exposure to climate-related risks, particularly by avoiding loans to industries reliant on fossil fuels This proactive approach not only mitigates potential financial losses but also fosters stronger customer relationships, reducing the risk of sudden changes in customer behavior that could affect liquidity Banks with a solid reputation for ethical practices are more likely to retain customers during financial stress Furthermore, focusing on ESG principles can unveil new business opportunities, such as investing in renewable energy projects, positioning banks favorably in the transition to a low-carbon economy and enhancing their financial performance while lowering liquidity risk.
Incorporating ESG factors into banking practices enhances risk management, fosters stronger customer relationships, and uncovers new business opportunities, ultimately leading to a reduction in liquidity risk.
In the past two decades, ESG practices have gained significant traction globally Research by Saif-Alyousfi et al (2023) indicates that banks in high-income countries exhibit greater potential for diversity through environmental disclosures Furthermore, these banks, along with those in upper-middle-income nations, experience increased income and asset diversification due to governance disclosures, surpassing their counterparts in other regions Additionally, findings from Andries and Sprincean (2023) highlight the trends among banks in various economic contexts.
33 developing countries reap the benefits of increased ESG performance in term of reduced financing costs.
This study examines the influence of ESG scores on liquidity risk across various income levels, including advanced economies, emerging market economies, and low-income developing countries, as detailed in Table 4.6 Banks in low-income developing countries are excluded from this analysis due to a lack of sufficient observations, as these institutions often do not prioritize ESG factors The developmental stage of these countries may lead to insufficient focus on environmental, social, and corporate governance issues, compounded by limited resources and capabilities to assess ESG factors effectively.
In Column (1), this study is adopted advanced economies with year-fixed effects In Column (2), this study includes emerging market economies with year-fixed effects.
Table 4.6 Additional Analysis: Country income level
Advanced Economies Emerging Market Economies
R-squared 0.825 0.080 Note: The Liquidity risk is a dependent variable measured by total deposit to total assets This table examines the ESG scores affect liquidity risk in income level Column (1) shows the result of the model to test for advanced economies with year-fixed effect Column (2) reports the result of the model test for emerging market economies with year-fixed effect Standard errors (in parentheses) are clustered at the year level Regression coefficients with the symbols ***, **, and
* denote significance at the 1%, 5%, and 10% levels respectively
My results in Table 4.6 indicate that ESG scores impact liquidity risk in advanced economies at the 1% level Meanwhile, ESG score impact on liquidity risk in emerging market
34 economies is insignificant For this reason, emerging market economies banks has regulations, corporate governance, and transparency are lower than in developed market (Khanna and Palepu, 2000).
CHAPTER 5: CONCLUSION This paper examines the nexus between bank’s Environment, Social, and Governance (ESG) scores and their liquidity risk international context, analyzing data from 740 banks across 70 countries from 2003-2022 We find that incorporating ESG scores reduce liquidity risk The results also indicate that environmental, social and governance scores reduce statistically significant impact on liquidity risk of global banks Additionally, banks that have low ESG scores are viewed to be risker because they are exposed to liabilities related to Environmental, Social and Corporate factors that ultimately raise their risk of failure Further analysis indicates that ESG is negative in a bank’s performance as Capital measured by total equity to total asset, Nior measured by non-interest income to revenues Meanwhile, ESG scores can significantly positive in Profit, Efficiency and Tlta Moreover, this study also performs a number of robustness tests and additional analysis tests to verify our findings. The evidence from the robustness tests, additional analysis revealed that there is a significant impact on liquidity risk of international banks following ESG scores especially in advanced economies.
Our research reveals that the connection between ESG (Environmental, Social, and Governance) factors and liquidity risk is effectively illustrated by stakeholder and sustainability theories According to stakeholder theory, companies can enhance their reputation and gain trust from customers and stakeholders through sustainable investments, thereby minimizing associated risks Sustainability theory advocates for proactive risk mitigation strategies, such as lowering greenhouse gas emissions and improving water efficiency, which can help organizations decrease their vulnerability to environmental and social risks while strengthening long-term resilience Additionally, this theory emphasizes the importance of transparency and accountability, which can mitigate reputational risks and foster trust among stakeholders.
This study highlights the need for policymakers and financial regulators to establish tailored frameworks for sustainable finance, encouraging banks to adopt these practices It emphasizes the importance of designing specific strategies for low-income and emerging market economies to enhance risk management Additionally, supportive policies should be created to incentivize businesses to invest in clean and green industries, fostering a more sustainable financial ecosystem.
36 with ESG standards Additionally, policymakers can help to the fight against corruption and advance transparency by encouraging good governance practices, which can encourage social and economic progress.
To enhance risk and liquidity management, banks must establish a strategy for maintaining cash reserves and easily liquidatable assets Additionally, implementing ESG scoring is crucial for promoting sustainable banking practices Adhering to ESG standards ensures that banks prioritize environmental and social responsibility alongside good governance, thereby fostering a balance between short-term profitability and sustainable long-term growth.
Investors can evaluate a bank's ESG score to gauge the sustainability of its operations A higher ESG score indicates that the bank adheres to rigorous environmental, social, and governance standards, reflecting its commitment to sustainable business practices This progress positions the bank as a reliable partner for investors prioritizing ESG considerations.
This study highlights a significant correlation between ESG scores and liquidity risks, underscoring the necessity for comprehensive ESG measurement frameworks globally to promote sustainable development To enhance future research, it is recommended to conduct a detailed decomposition analysis of the Environment, Social, and Governance pillars in relation to liquidity risks across banks in advanced, emerging, and low-income economies Additionally, tailored recommendations for ESG practices should be formulated based on the varying income levels of different countries.
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