Enhancing Firm Value through the Lens of ESG Materiality: Evidence from the Banking Sector in OECD Countries

Abstract

Momentous developments in the regulatory environment, increasing investor demand, and growing awareness of climate change and societal issues are leading banks to adopt a comprehensive approach beyond the traditional financial lens. Assessing performance towards sustainability issues, including environmental, social, and corporate governance (ESG), and its' relevance in firm value in the banking sector offers a field of continuous interest for researchers. This paper investigates the role of ESG materiality in firm value, based on a sample of banks operating in OECD countries, for the period 2016-2020. Adopting the materiality classification for the banking sector provided by the Sustainability Accounting Standards Board (SASB), the study consists of a multi-layer methodology. In the first stage, a dynamic technique for order preference by similarity to ideal solution (TOPSIS) and entropy methods are utilized to calculate ESG score based on ESG materiality for 1115 bank-year observations while in the second stage, value relevance analyses are applied in order to reveal whether ESG materiality affects firm value. The results depict that ESG performance based on ESG materiality has a positive influence on the firm value for both models, price-to-book value ratio (PBV), and Tobin's Q (TQ). Moreover, collected from the Refinitiv database, ESG combined has a low impact on PBR whereas there is no significant effect on TQ. The implication is that the firm value is influenced by the materiality-adjusted ESG performance than by the extended ESG spectrum.