The Link Between ESG, Corporate Governance and Stock Performance of European Financial Institutions

This paper employs corporate governance, ESG (Environmental, Social, and Governance) information, and data from publicly listed European banking institutions in order to shed light on their impact on financial performance as measured by the Sharpe Ratio, over the period from 2015 to 2021. To this end, we test ESG annually published results and their reliability grade interaction with the Sharpe Ratio. The empirical results demonstrate that an increase in ESG reliability affects the financial stock performance significantly of these institutions. This evidence signifies the importance of Governance as the critical pillar-factor of interaction. Changes in the metrics of ESG indicate significant interaction with the Sharpe Ratio of European banking institutions. Our findings suggest that rising reliability in ESG results forms a critical factor positively affecting the Sharpe Ratio and the decisions of long-term investors. Our study contributes to a deeper understanding of the relationship between ESG factors and financial performance in the European banking sector, highlighting the vital role of reliable ESG reporting in investment decisions.