An empirical investigation of banks’ sustainability performance under economic policy uncertainty

Alam, Ahmed W ORCID: https://orcid.org/0000-0002-9888-0936, Hassan, M Kabir ORCID: https://orcid.org/0000-0001-6274-3545 and Banna, Hasanul ORCID: https://orcid.org/0000-0002-6902-8525 (2024) An empirical investigation of banks’ sustainability performance under economic policy uncertainty. Journal of Sustainable Finance and Investment. pp. 1-24. ISSN 2043-0795

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Abstract

This paper empirically explores the effect of policy-related economic uncertainty on banks’ sustainability performance, measured by bank-level environmental, social, and governance (ESG) ratings. Based on a sample of U.S. banks, the results indicate that high economic policy uncertainty (EPU) increases banks’ overall ESG scores, supporting the stakeholder perspective of corporate philanthropic engagement. This positive effect seems regardless of bank size and remains valid across the environmental and social dimensions of ESG. The results survive a battery of robustness tests using alternative measures of EPU and ESG, introducing additional control variables, and using sub-samples based on the adoption of a major climate policy agreement. Documenting fresh evidence on the ESG-EPU relationship for U.S. banks at the national level, our paper provides strong incentives for future research on sustainable banking practices under economic policy risk in regional and global settings.