Diverse Boards Boost ESG Performance

PASSADOR AND CREMONA FIND THAT THE PRESENCE OF A SUSTAINABILITY COMMITTEE AND BOARD DIVERSITY IN TERMS OF GENDER AND BACKGROUND IMPROVE ESG PERFORMANCE

The correlation between a well-developed corporate governance framework, a company’s market value and its financial performances has been documented in empirical research. But what about the relationship between board of directors and environment, social and corporate governance (ESG) performance? Studying this relationship seems more useful than ever as ESG investing becomes mainstream.
 
In the paper “What About the Future of European Banks? Board Characteristics and ESG Impact,” Maria Lucia Passador and Brando Maria Cremona, respectively Academic Fellow and PhD Candidate at Bocconi, looked at EU listed companies to study the distinctive traits of the board of directors, and the relationship between ESG performance and the financial performance/company value together with the number of M&A transactions undertaken in the banking field.
 
First, Passador and Cremona screened 1,194 EU listed companies’ non-financial disclosure reports (around one-quarter of which from the financial sector) published in 2018. Then, given the results achieved, they focused on the banking sector specifically in order to establish the extent to which ESG’s performance impacts on some key corporate factors (performance, firm value and M&A transactions).
 
The study suggests that boards should promote the presence – among board committees – of an ad hoc sustainability committee, the proportion of women within the board, the mid-range attendance at meetings, the board tenure, and all these factors tend to good ESG performance, whereas directors’ compensation and ESG-sustainability indicators have a positive although less appreciable effect.
 
“Seems like we are heading in the right direction, that of diverse (both in terms of gender and background), sustainability-driven boards, increasingly committed, trying (at least) to take care of (and get concrete about) stakeholder needs,” said Passador.
 
More specifically on banks and ESG, a whole section of the study is dedicated to the relationship between ESG performance of the target company and the premium price paid in an M&A transaction. The ROA (return on assets) of European banks and ESG performance have a significant positive correlation, with a leading social element in its calculation. Making investments in projects that have a beneficial influence on the environment, shareholder/stakeholder relationships, and internal governance mechanisms will allow banks to perform better. Unexpectedly, no correlation between a company's valuation and its ESG performance has been observed in the study of the European sample considered.
 

by Jennifer Clark