Do sustainable banks outperform?
Driving value creation through 
ESG practices

Report background
This document does not constitute an offering of securities of any kind and is intended 
to convey only basic background information. Nothing herein may be construed as a 
representation or warranty by the Global Alliance for Banking on Values (GABV), the 
European Investment Bank (EIB), Deloitte or KKS Advisors.
The information contained herein may not be interpreted as binding or guaranteed with 
respect to the past, present or future. Financial information and other data contained 
in this document are based on subjective analyses and have not been independently 
verified. This publication has been written in general terms and we recommend that you 
obtain professional advice before acting or refraining from action on any of the contents 
of this publication. The GABV, the EIB, Deloitte and KKS Advisors accept no liability for any 
loss occasioned to any person acting or refraining from action as a result of any material 
in this publication. The views and assessments contained in this report reflect the views 
of the authors and do not necessarily represent the views of the EIB, the GABV or Deloitte. 
Please refer to the back page of this report for further disclaimers. 
This research was initiated by the Global Alliance for Banking on Values (GABV) following 
exchanges with the European Investment Bank (EIB) about the links between financial 
performance and sustainability focus. With the support of the EIB and Deloitte, GABV 
contracted KKS Advisors to replicate analysis originated by Professor George Serafeim 
regarding linkages between financial performance and focus on material sustainability 
issues as defined by the Sustainability Accounting Standards Board (SASB) for the largest 
commercial banks in the world.

Contents
1.	Executive summary	
2
2.	Introduction	
4
3.	Materiality	
7
4.	Research approach	
12
5.	Results	
13
6.	Conclusions	
15
7.	 About the authors	
16
8.	Research supporters	
17
9.	Appendix: List of banks	
18

Research shows 
that for financial 
institutions, the 
simultaneous 
pursuit of 
sustainability 
priorities and 
strong financial 
performance does 
not conflict with 
one another but 
rather, support 
each other 
when driven by 
consistent strong 
overall leadership.
1. Executive summary
A growing number of companies around the world have voluntarily adopted and implemented a broad 
range of sustainability practices as a response to emerging challenges and stakeholder expectations 
across the environmental, social and governance (ESG) space. These efforts have resulted in 
a proliferation of data and ratings available to investors to help them integrate ESG performance in 
their capital allocation decisions. Academics and practitioners using ESG information have presented 
extensive evidence on the benefits of integrating ESG criteria into the investment process, from both 
an operational and risk‑return perspective.
In a seminal paper, Professor George Serafeim and co‑authors found that firms with good ratings on 
industry‑strategic sustainability issues deliver significant financial outperformance over firms with poor 
ratings on the same issues.1 The research made a clear distinction between ESG issues that are deemed 
material and immaterial within an industry. In contrast with immaterial factors, material ESG factors 
are sustainability issues that are likely to impact the financial condition or operating performance of 
a company and, therefore, are most important to investors.
While ESG materiality‑focused research has proliferated, to date there has been limited research 
focusing on the impact of ESG factors on returns in the financial sector, and more specifically in the 
banking industry.
The Global Alliance for Banking on Values (GABV) consists of banks that focus on delivering value to 
society by using finance to deliver sustainable economic, social and environmental development. 
The GABV believes that this focus delivers stable financial returns. Supporting this hypothesis is the 
annual research of the GABV, commencing with year end 2010, comparing the financial profiles and returns 
of its members with the largest banks in the world.2 The GABV, along with the European Investment Bank 
and Deloitte have supported this research to give more scientific weight to the hypothesis that an ESG 
focus increases firm value. To that end, the purpose of this report is to test the relationship between ESG 
and financial performance within the context of the commercial banking industry.
Using publicly available data on each of the 100 banks included in the sample (see Appendix for the list of 
banks), we evaluated and scored banks on their pursuit of material and immaterial sustainability issues. 
In analysing their stock returns from 2007 to 2017, we determined that those banks that consistently 
scored high on material ESG issues delivered higher risk‑adjusted returns compared to those banks 
that performed poorly on the same issues, while the opposite was found for immaterial ESG issues. 
These results suggest that a focus on material sustainability issues is likely to coincide with enhanced 
financial returns.
Research shows that for financial institutions, the simultaneous pursuit of strategic sustainability 
priorities and strong financial performance does not conflict with one another but rather, support each 
other when driven by consistent strong overall leadership. The enhanced performance on ESG factors 
and financial returns are a result of this overall stronger leadership. These results are consistent with the 
GABV view that delivering value to society will lead to, or is directly linked to, value for all stakeholders 
including shareholders.
We consider our evidence as a solid first attempt at providing industry‑specific insights, adding 
significant weight to the argument for integrating ESG issues into corporate strategy and capital 
allocation decisions. Although the ESG data landscape has improved over the last few years, there 
is still a need for more ESG data that is financially material, forward‑looking, complete and timely. 
By highlighting the financial relevance and importance of ESG factors, our research adds to the 
business case for action by all market participants to increase standardisation and robustness of ESG 
information, to enhance reliability for decision making by companies and investors.
1	 Khan, M., G. Serafeim and A. Yoon (2016), “Corporate Sustainability: First Evidence on Materiality”, The Accounting Review 
91(6): 1697‑1724.
2	 The largest banks in the world are the Global Systemically Important Banks as defined by the Financial Stability Board. 
The GABV analysis is available at: http://www.gabv.org/wp-content/uploads/2018-Research-Report-v1.11.pdf 
page 2
Do sustainable banks outperform?

Introduction
Materiality
Research
approach
Results
Conclusions
Report roadmap
• Interest in link between ESG and 
 ﬁnancial performance
• Research objectives
• Deﬁnition of ESG materiality
• Material and immaterial ESG 
 issues considered
• Sample and data
• Our approach to Materiality and 
 Immateriality indexing
• Top vs Bottom portfolio results
• Robustness tests
• Contribution of the research
• Recommendation for future research
page 3
Do sustainable banks outperform?

An increasing 
number of 
companies 
identify ESG 
issues as strategic 
components of 
long‑term success.
2. Introduction
Climate change and broader issues of sustainability have become urgent issues for society. 
Business leaders now see such factors as major risks affecting long‑term success – whether as 
a response to the concerns of society to demonstrate positive impact, or as boards recognise that 
these issues can lead to substantial risks to their performance and prospects. This has been set 
out, for example, by Blackrock Chairman and CEO Larry Fink in his 2018 Letter to CEOs: “To prosper 
over time, every company must not only deliver financial performance, but also show how it makes 
a positive contribution to society. Companies must benefit all of their stakeholders, including 
shareholders, employees, customers, and the communities in which they operate.”
Companies are increasingly seeking to integrate wider factors such as the needs of stakeholders and 
sustainability performance – into their business model, rather than considering them as a separate activity 
within the business. As a result, companies understand that long‑term value creation and financial returns 
are inextricably linked to their core purpose and how they create value for their stakeholders. To quote 
Larry Fink again, “Purpose is not the sole pursuit of profits but the animating force for achieving them”. 
These trends make ESG issues an integral component of companies’ strategies.
The corporate side
Companies have historically used terms such as sustainability, corporate social responsibility, social 
impact, and shared value almost interchangeably to describe a wide range of goals and strategies to 
measure and manage their environmental and social impact. Understanding is now increasing of the 
relationship of these impacts with sources of value, competitive advantage, brand reputation, trust 
among customers and the ability to attract employees. Companies are therefore seeking to evaluate
and integrate relevant ESG factors into their strategy and risk management.
An increasing number of companies identify ESG issues as strategic components of long‑term 
success. Of the world’s largest 250 companies, 93% report on their ESG performance.3 The majority of 
publicly‑listed companies, along with several private companies, are now being evaluated and rated 
on their ESG performance by a wide range of third‑party providers of data and analytics. The Global 
Initiative for Sustainability Ratings identifies over 600 ESG products globally from more than 
150 organisations, providing more than 10,000 unique ESG metrics and performance indicators.4 
Numerous studies have emerged describing the benefits of having sound ESG standards for a company: 
from lower cost of capital, to better operational performance, and better stock price performance.5  
Moreover, companies that integrate ESG factors into their strategy and business model are significantly 
more likely to attract more dedicated long‑term investors with low portfolio turnover and more 
concentrated holdings rather than they are to attract transient investors with high portfolio turnover 
and highly diversified holdings.6 
In a seminal paper, Serafeim and co‑authors found that companies with good ratings on material 
ESG issues significantly outperform companies with poor ratings on the same issues. Conversely, 
companies with good ratings on immaterial sustainability issues do not significantly outperform 
companies with poor ratings on the same issues.7 These results emphasise the importance for 
companies and investors to understand the material and immaterial ESG issues that can affect 
financial and operational performance, given their impact on value creation.
3	 See www.globalreporting.org/information/news-and-press-center/press-resources/Pages/default.aspx
4	 Global Initiative for Sustainability Ratings (July 2017), http://ratesustainability.org/hub/index.php/search/report-in-graph.
5	 KKS Advisors and High Meadows Institute (2016)
6	 See, for example, University of Oxford and Arabesque Partners (2015), ‘From the Stockholder to the Stakeholder – 
How sustainability can drive financial outperformance’; Clark, Feiner and Viehs (2015) who provide a comprehensive 
knowledge base on ESG and find that it is in the interest of companies to integrate sustainability into their 
decision‑making process. Additionally, see Eccles, Iannou and Serafeim (2011) for more evidence on the positive impact 
on corporate performance deriving from valuable sustainability practices.
7	 Khan, M., G. Serafeim and A. Yoon (2016), “Corporate Sustainability: First Evidence on Materiality”, The Accounting Review      
91(6): 1697-1724.
page 4
Do sustainable banks outperform?
.

The main reason 
for investors to 
include specific 
sustainability 
information in their 
asset allocation 
decisions has 
been the current 
or potential 
materiality of 
ESG issues that are 
seen to be relevant 
to an industry. 
The investor side
Investors are increasingly seeking to understand the ESG risks and performance of the companies 
they invest in, and how they can impact returns over time. They have employed a large number of 
terms, such as sustainable investing, responsible investing and ESG investing to describe how they are 
assessing the potential impact of ESG issues on a company’s current and future performance. However, 
they are increasingly seeking to integrate ESG considerations into their mainstream portfolios.
ESG investment products flood the market in almost every investment category, from ETFs to fixed 
income and alternatives. The value of global assets allocated via ESG‑related strategies has grown 
from US $13.2 trillion in 2012 to an estimated US $30 trillion in 2018.8
The main reason for investors to include specific sustainability information in their asset allocation 
decisions has been the current or potential materiality of ESG issues that are seen to be relevant to
an industry.9 Similarly, an MIT Sloan Management Review report found that due to the strong link 
between material ESG issues and financial performance, investors inform their investment decisions 
on the basis of companies’ sustainability performance.10 To further corroborate the evidence, several 
practitioner research papers and studies have looked at the integration of material ESG factors into 
investment strategies and found consistent results.11
This perspective is also consistent with investors’ role as stewards – to seek long‑term value for clients 
and beneficiaries which lead to wider economic, environmental and social benefits, to quote the UK’s 
Stewardship Code 2020.12
8	 Global Sustainable Investment Review (2018).
9	 See Section 3 of this report on Materiality.
10	 Unruh, Kiron, Kruschwitz, Reeves, Rubel, and zum Felde (2016).
11	 Examples include but are not limited to: Bender, Sung, and Wang (2017); Schoenmaker and Scharamade (2018); Aschwin 
Kumar, Smith, Badis, Wang, Ambrosy, and Travares (2016); Amel‐Zadeh (2018).
12	 See UK Stewardship Code 2020, issued by the Financial Reporting Council, 2019. 
page 5
Do sustainable banks outperform?

ESG issues for commercial banks
The concept that ‘doing good’ is good business also applies to the banking sector. Since 2012, the 
GABV has conducted research looking at the impact of value‑based banking on key economic and 
financial indicators.13 Their findings echo the evidence of the broader ESG literature, highlighting how 
value‑based banking is associated with steady financial returns, higher growth, and solid capital 
position.
But the wider ESG issues affecting banks’ clients and customers also lead to risks to the banks 
themselves. The ESG risks of the companies that banks invest in or extend lending to are directly 
linked to credit exposure over time. Companies that are affected by climate change, risks to their 
‘social license to operate’ or other ESG factors can succumb to financial and operational pressures that 
mean they are unable to meet their commitments to lenders. For example, a bank’s issuance of loans 
to carbon‑intensive industries and corporates could be significantly impacted by potential carbon 
pricing legislation. Such issues pose exposure risk that needs to be measured and managed.
Banks can also bring positive impacts to society and the environment. They can help people and 
businesses prosper and grow. The value created through this process is, by definition, shared with 
the broader community. This value can be increased through the policies adopted in other areas, 
for example supporting community business, and broadening access to banking services to the 
underbanked. But the biggest potential impact for commercial banks is through their portfolio of loans 
and investments. Providing attractive terms to companies that have high ESG performance or who are 
leading the transition to a low‑carbon economy will create positive impact – and enhance the bank’s 
own reputation. Likewise, adding clauses to lending agreements to reduce negative impacts can also 
lead to wider benefits.
This illustrates a cycle of value creation, where material issues relating to a bank’s wider impact on 
society and the environment (stakeholder perspective) also affect the performance and prospects 
of the organisation itself (company and investor perspective). Thinking strategically about social and 
environmental responsibility and identifying the ESG issues that are most material for a bank is crucial 
to creating a positive cycle of value creation. Yet, banks have heterogeneous approaches to ESG issues 
that rarely place them at the heart of their business models. As a result, banks could be underplaying 
drivers of value and competitive advantage.
This model of the ‘cycle of value creation’ is well illustrated in the UN Principles for Responsible 
Banking, formally launched in September 2019.14 On the one hand, the principles call for banks to 
manage their direct impacts on people and the environment (principle 2). On the other, the principles 
emphasise the key impact banks can have through their clients and customers, to “encourage 
sustainable practices and enable economic activities that create shared prosperity for current and 
future generations” (principle 3).
Our objective
The goal of this report is to explore the impact of material ESG issues on the commercial banking 
industry. More specifically, assuming an investor perspective, we wish to understand if commercial 
banks with good ratings on material ESG issues have the potential to outperform banks with poor 
ratings on the same issues. 
13	 ‘GABV (various years), “Real Economy – Real Returns: The Business Case for Values‑based Banking”.
      Available at www.gabv.org
14	  See www.unpri.org/pri/an-introduction-to-responsible-investment/what-are-the-principles-for-responsible-investment
Commercial banks 
need to take a 
long-term view 
relative to risk 
underwriting. That 
long-term view 
must incorporate 
potential risks 
from the impact 
of climate change 
or the impact of 
societal pressure 
on companies 
to address 
climate change.
page 6
Do sustainable banks outperform?

3. Materiality
When assessing 
the relationship 
between a company’s 
performance 
on ESG issues 
with its financial 
performance, the 
reality is that not 
all ESG issues 
matter equally, 
and their relevance 
varies industry to 
industry.
Which ESG information is the most useful to shape firm strategies and investments? Does water resource 
management have the same potential to impact the bottom line of a mining company as it does for an 
investment bank? When assessing the relationship between a company’s performance on ESG issues 
with its financial performance, the reality is not all ESG issues matter equally, and their relevance varies 
industry to industry. The concept of materiality helps in providing some framing to discern relevant and 
irrelevant, strategic and non‑strategic ESG issues for a given industry. For this study, we have adopted 
a similar approach to financial reporting to define material ESG issues as those that are likely to impact 
the financial condition or operating performance of a company. This lens helps to identify the most 
valuable company information for investors.15 Similarly, ESG immateriality in this study refers to any ESG 
issue that does not significantly impact a firm’s financial performance, which may be of less relevance to 
an investor.
For the purpose of framing materiality for the commercial banking industry, we followed the guidance 
of the Sustainability Accounting Standards Board (SASB). The SASB identifies material ESG issues 
and associated accounting metrics for each of 77 industries grouped according to its Sustainable 
Industry Classification System (SICS), by collecting evidence of interest and financial impact together 
with the views and expectations of industry experts. The results of the SASB’s materiality process 
are summarised in their Materiality Map.16 We follow the SASB’s guidance as of November 2018 to 
identify the following material ESG issues for the Commercial Banking industry. We have used the SASB 
definition of materiality for this study because of the investor lens that the SASB has applied to its 
standards (see the following page).
15	 It is crucial that a bank’s performance against all immaterial issues is quantifiable. We excluded all ESG issues 
that are either irrelevant for a commercial bank’s business model or where data availability is significantly low. 
Excluded immaterial ESG issues are: Air Quality, Waste Management, Ecological Impacts, Product Quality and Safety, and 
Customer Welfare.
16	 The latest version of SASB’s Materiality Map can be found at https://www.sasb.org/standards-overview/materiality-map 
SASB updates its framework regularly. In every update materiality for each industry is updated to match new industry 
assessments. Accordingly, the mapping of issues to disclosure topics and/or metrics may also evolve.
page 7
Do sustainable banks outperform?

We have used the SASB’s approach to material ESG issues because it is aligned to the ‘investor 
lens’ and adopts standards that relate to operational and financial impacts on an organisation. 
This allows us to understand likely dependent factors that can directly affect the organisation’s 
performance. “By viewing ESG factors through the lens of financial materiality… an organisation 
can focus on covering a small subset of ESG metrics that are most important to its success over 
time by reducing risk and contributing to growth and creation”, as noted by Herz, Monterio and 
Thomsom.17 This approach is consistent with the aim of this research.
Companies also consider their wider impacts on the economy, society and the environment, 
adopting a ‘stakeholder lens’. They do this for a number of reasons: to engage with stakeholders; 
to measure and communicate the impacts achieved through the company’s purpose and strategy; 
to show they are a responsible citizen. There are also increasingly disclosure requirements in 
this area (for example, greenhouse gas emissions). Furthermore, companies recognise that their 
external impacts can lead to future risks to the enterprise. For example, limits on availability and 
use of resources, reputation impact, increasing costs, access to talent, business disruptions. 
The SASB’s aim is to create and disseminate industry‑specific accounting standards for 
material sustainability issues for use by publicly listed companies and their investors. SASB’s 
model is very similar to the one of FASB (Financial Accounting Standards Board), set up almost 
40 years ago to establish and improve standards of financial accounting and reporting. FASB’s 
standards are now recognised as authoritative by the Securities and Exchange Commission (SEC). 
Therefore, SASB’s focus is to get ESG information through mandatory financial filings (like the 
Form 10‑K in the USA), which is different than other voluntary frameworks that provide a framing 
for voluntary sustainability reports. Although we use the SASB framework to define materiality, 
this is not the only framework available. For example, the Global Reporting Initiative includes 
guidance on materiality through their GRI standards.18 The overall aim of the GRI standards is 
to help organisations communicate about the impacts they have on the economy, environment 
and society. In that sense, GRI recommends that organisations consider the full picture of their 
outward impacts when defining materiality, rather than just the impacts that have immediate 
consequences from a business perspective (such as financial costs or a damaged reputation).
Irrespective of the choice of the framework that is used to define ESG material issues for 
a company and an industry, a key takeaway is that materiality is a dynamic concept that evolves 
over time as new business models emerge, regulatory pressures increase, and consumer 
awareness and demands grow.
17   Herz, Monterio and Thomson, ‘Leveraging the COSO Internal Control – Integrated Framework to improve        
confidence in sustainability performance data’, page 50. 
18   Source: https://www.globalreporting.org/standards/questions-and-feedback/materiality-and-topic-boundary
page 8
Do sustainable banks outperform?

The main reason 
for investors to 
include specific 
sustainability 
information in their 
asset allocation 
decisions has 
been the current 
or potential 
materiality of 
ESG issues that are 
seen to be relevant 
to an industry.
Material issues for commercial banks
	• Access and affordability: This issue revolves around a bank’s deposit and customer base. Banks with 
significant and diversified deposit funding bases and strong management of credit and other forms 
for risk lower the bank’s overall risk profile and should lead to a lower cost of capital, enhancing 
financial returns. The reputational benefits stemming from addressing the issue of access and 
affordability leads to a higher evaluation of a bank’s intangible assets. For these reasons, issues such 
as lending to promote community development and small business growth, and financial inclusion, 
are material issues for commercial banks.
	• Labour practices: Banks need to make sure that the service they provide is of the highest quality 
to attract more customers and increase their deposit base. High standards in the workplace and 
labour,  with policies related to exploited labour, remuneration (fair wages and overtime pay), as well 
as appropriate benefits are crucial for attracting and retaining a strong workforce. A competent and 
loyal workforce can significantly enhance operational efficiency by reducing turnover and improving 
the quality of customer care, which is then able to help banks gain a larger client base. Moreover, the 
improved reputation stemming from fair workplace practices can increase a bank’s overall value.
	• Data security and customer privacy: Ensuring privacy and security is a crucial component of a bank’s 
responsibility towards its customers. Potential accidents and breaches can lead to detrimental 
contingent liabilities, including fines, which can increase costs for a company and worsen its 
operational efficiency. The reputational damage associated with such breaches could also decrease 
the value of the bank’s intangibles and the riskier profile would result in a higher cost of capital.
	• Lifecycle impacts of products and services: Banks have to address multifaceted sustainability 
issues that can represent direct and often indirect risks and opportunities. Borrowers’ risk profiles 
should be assessed by including ESG factors that can significantly impact their credit worthiness and 
impair loan repayments. In such instances, interest income could decrease, and the balance sheet 
would weaken due to the high risk associated with loans and collaterals. In the long‑term, this could 
negatively affect a bank’s credit rating, default risk and its cost of capital.
	• Business ethics: This issue concerns a culture that promotes responsible practices, and compliance 
with the regulatory environment surrounding the commercial banking industry. An instance of 
regulatory non‑compliance could not only harm a bank’s reputation, but could also lead to costly 
contingent liabilities and reduced business activities, thus worsening a bank’s operational efficiency. 
Overall, failure to comply with regulations and good practices could deteriorate a bank’s credit 
rating, increase its cost of capital, and reduce shareholder value.
	• Systemic risk management: Systemic risk management practices which respond to related 
regulations ensure a bank’s resilience against financial and economic stress. High levels, quality, 
and consistency of capital ratios can thus provide a bank with a competitive advantage and 
improved operational efficiency. Overall, an adequately managed capital base improves credit rating 
and lowers cost of capital. Banks involved in litigations and external oversight due to regulatory 
non‑compliance have to face costly contingent liabilities and reputational costs. As a result of 
worsened operational efficiency and lower value of intangible assets, market share and firm value 
can significantly decrease.
page 9
Do sustainable banks outperform?

Diversified banks
As outlined, we have adopted an approach to materiality that is specific to an industry. Some commercial 
banks also have investment banking or asset management divisions, which creates the need to consider 
additional ESG material issues from these industries. The main industries of diversification for our 
sample are Asset Management & Custody Activities and Investment Banking & Brokerage (see chart).
For these industries, we followed the same approach described by the SASB to select ESG issues that 
are material to the two industries. These were:
	• Fair marketing and advertising: Asset management companies have a fiduciary requirement to 
provide transparent information to ensure that clients appreciate the nature of risks undertaken. 
Failing to comply with fair marketing and transparent information requirements can result in higher 
regulatory oversight, higher administrative expenses, and higher risk of litigation, which lead to 
lower value for shareholders.
	• Compensation benefits: Employee compensation can incentivise either short‑term or long‑term 
performance. Compensation practices that incentivise risk‑taking in favour of higher short‑term 
returns can disrupt client portfolios and decrease shareholder value. Long‑term focused 
compensation schemes can limit losses, litigation and reputational damage, and safeguard 
shareholder value.
	• Diversity and inclusion: Plentiful evidence suggests that diversity among company management 
and workforce in terms of age, race and gender, in addition to education, values and experience, 
is correlated with greater shareholder value and improved efficiency metrics. Enhanced disclosure 
on the topic of diversity will allow investors to assess how companies are managing risks and 
opportunities associated with this issue.
	• Integration of ESG risk factors: ESG integration has been increasingly shown to contribute to 
improved market value. Asset management and custody activity companies failing to address 
these issues could suffer lower risk‑adjusted returns and ultimately reduce shareholder value. 
Similarly, investment banking and brokerage companies that fail to include ESG issues in their 
advisory services and products offered would appear as negligent, leading to risks of litigation, 
reputational damage and decreased shareholder value.
	• Management of the legal and regulatory environment: Failing to comply with relevant regulations 
can have detrimental effects on firm value due to contingent liabilities, reduced business activities, 
reputational risks, and increased regulatory oversight.
	• Systemic risk management: Failing to comply with regulatory requirements and the lack of a prompt 
response to new regulations can result in intensified regulatory oversight, higher risk of litigation, 
contingent liabilities, reduced operational efficiency and a changed reputation, all leading to greater 
risk for shareholders and reduced firm value.
69 
20
4
7
Commercial Banking
Asset Management
Investment Banking
Asset Management and 
Invesment Banking
Diversiﬁed banks – Main industries (in %)
page 10
Do sustainable banks outperform?

Immaterial issues for commercial banks
For this study, immaterial ESG issues include sustainability fields and categories the SASB did 
not reasonably consider would impact the financial condition or operating performance of 
commercial banks.
Similar to our previous materiality assessment, we follow the SASB’s guidance as of November 2018
to identify immaterial ESG issues for our sample of diversified commercial banks.19
These issues are considered immaterial as they are assessed from the angle of the direct operational 
impacts of commercial banks (e.g., staff activities, use of offices, etc.). The issues (such as direct GHG 
emissions, health and safety, energy and waste management etc) are less material in the context of 
the operational impact of a commercial bank when contrasted with heavy industry, for example. 
However, it is important to note that all these issues are considered as material for commercial banks 
through the impact of their investments and products. See for instance, the aforementioned issues of 
‘Lifecycle impacts of products and services’ for commercial banks and ‘integration of ESG risk factors’ 
for diversified banks.
GHG emissions and climate change: The issue addresses a company’s direct and indirect GHG 
emissions. The category further includes management of the regulatory risks, environmental 
compliance, and reputational risks and opportunities.
	• Energy management: The issue addresses environmental impacts associated with energy 
consumption.
	• Water resource management: The issue addresses a company’s water consumption, use and 
wastewater generation, as well as the company’s management of the resource through its operations 
and policies.
	• Human rights and community relations: The issue addresses the relationship between businesses 
and the communities they operate in, including but not limited to: management of direct and indirect 
impact on core human rights, including socioeconomic community impacts, community engagement, 
environmental justice, and cultivation of local workforce.
	• Employee health and safety: The issue addresses the company’s ability to maintain a safe and 
healthy workplace environment that is free of injuries, fatalities and illness. It includes safety 
management plans, employee training, as well as regular audits.
	• Business model resilience: The issue addresses the ability to manage risks and opportunities 
associated with incorporation of environmental, social and political transitions in the 
long‑term business model and planning. It includes the ability to adapt to a low‑carbon and 
climate‑constrained economy. The category highlights industries (for example, construction, 
manufacturing and mining) in which evolving environmental and social realities may challenge 
companies to fundamentally adapt and reconsider their business model.
19	 It is crucial that a bank’s performance against all immaterial issues is quantifiable. We excluded all ESG issues    
that are either irrelevant for a commercial bank’s business model or where data availability is significantly low. 
Excluded immaterial ESG issues are: Air Quality, Waste Management, Ecological Impacts, Product Quality and Safety, and 
Customer Welfare.
Immaterial ESG 
issues include 
sustainability fields 
and categories 
that the SASB did 
not reasonably 
consider would 
impact the 
financial condition 
or operating 
performance of 
commercial banks. 
page 11
Do sustainable banks outperform?

4. Research approach
Sample and data
The sample of commercial banks we analysed comprises the top 100 international banks by 
market capitalisation as of September 2018, falling under SIC’s primary industry classification of 
Commercial Banking.
We used Bloomberg to source ESG data for our sample of commercial banks. In order to identify which 
Bloomberg fields to use for assessing performance against material and immaterial issues, we used 
a SASB‑to‑Bloomberg mapping of metrics. The Bloomberg dataset we used provides only observed 
(collected) raw data and not imputed or modelled data. Therefore, the presence of a large number of 
data gaps required extensive data imputation efforts. For that purpose, we used both a rules‑based 
imputation approach, drawing from the observed distribution of the data, and compared our results 
with a k‑NN imputation as a robustness check. Our time frame of analysis spanned 10 years, between 
2007 and 2017.
Materiality and Immateriality index and portfolio formation
In order to score commercial banks from highest to lowest each year on both material and immaterial 
ESG issues, we developed a Materiality Index and Immateriality Index. To make commercial banks 
comparable across issues, we standardised all Bloomberg metrics to create issue specific scores. 
These issue‑specific scores were aggregated into a Materiality Index and Immateriality Index, and both 
were scaled from 0 to 100 to allow for easy interpretation of the indices. We follow this methodology 
for each year in our sample in order to a create a time series of Materiality and Immateriality indices to 
use in our stock selection process.
To form our materiality and immateriality portfolios, each year we select the top and bottom 
20 scoring commercial banks in the Materiality and Immateriality indices, respectively, for that year. 
Equally weighted portfolios are held from the beginning of the year and rebalanced annually at the 
beginning of the following year.
Portfolios’ alpha (or risk‑adjusted return) is estimated using Fama and French (1993) monthly 5‑factor 
regressions including market, size, book‑to‑market, momentum and liquidity factors. The meaning 
of the estimated alpha is the residual portfolio return predictability that is left unexplained by the 
systemic risk factors included in the model and that can instead be explained by the ESG materiality 
trading strategy here adopted.
100
top international banks by 
market capitalisation
2007‑2017
time period
Materiality
Index
scored

on material issues
Immateriality
Index

on immaterial issues
page 12
Do sustainable banks outperform?
banks
scored
banks

5. Results
Materiality portfolios
Consistent with Serafeim et al. (2016), we found an outperformance of the top materiality portfolio with 
respect to the bottom materiality portfolio. The graph below shows the performance of $1 invested 
in each portfolio at the beginning of 2007 and held until the end of 2017. Investing $1 in the beginning 
of 2007 in the top materiality portfolio would have grown to $1.76 by the end of 2017. In comparison, 
investing $1 in bottom materiality portfolio for the same period, would have grown to $1.32.
Performance of top vs bottom materiality portfolios (2007-2017)
Top Materiality
US $
Bottom Materiality
0.20
0.60
1.00
1.40
1.80
01/2007
01/2016
01/2008
07/2009
01/2010
01/2011
01/2012
01/2013
01/2014
01/2015
01/2017
We found that from the beginning of 2007 to 2013, the two portfolios behave very similarly and show very 
little difference in compounded performance. In 2014 we start to observe an increase in performance 
from the top materiality portfolio and a spike in outperformance throughout 2017 compared to the 
bottom materiality portfolio. Potential explanations for the change observed after 2014 include:
	• Improvement in ESG data quality and coverage: ESG data has been evolving over time, both in terms 
of the quality of the reported information but also in terms of the coverage. Better data reduces the 
error margin during data gap imputation and can lead to more accurate portfolio results.
	• ESG issues becoming more important: An increasing interest in sustainable products from 
a consumer perspective could be directly linked to improved performance of commercial banks that 
have better minimised their ESG risks and capitalised in ESG opportunities.
Using a 5‑factor model, we tested the difference in performance of the two portfolios average 
risk‑adjusted returns (alpha) over the period of analysis. Both portfolios deliver positive alphas, but the 
top materiality portfolio outperforms the bottom materiality portfolio by 2.65% in average risk‑adjusted 
returns, making our results consistent with the literature on ESG‑tilted investment decisions.
Immateriality portfolios
Results for the immaterial portfolios are also consistent with Serafeim et al. (2016), where high scoring 
 in immaterial issues underperform low‑scoring 
Though the extent of the difference in performance between the two immateriality portfolios 
pronounced as for the materiality portfolios, our results suggest that investing in immaterial 
sustainability issues does not give commercial banks a competitive edge.20 
 
Similar to our materiality portfolios, we tested the financial performance of our immateriality 
portfolios using a 5‑factor model. Again, both portfolios deliver positive alphas (though lower than the 
materiality portfolios). We found an outperformance of 0.66% in average risk‑adjusted returns of our 
bottom immateriality portfolio over the top immateriality portfolio, confirming the strategic relevance 
of material ESG issues over immaterial ones.
20	Russell Investments, 2018, ‘Materiality matters: Targeting the ESG issues that impact performance.’
The top 
materiality portfolio 
outperforms the 
bottom materiality 
portfolio by 2.65% 
in average risk-
adjusted returns, 
making our results 
consistent with the 
literature on ESG-
tilted investment 
decisions.
Key results
	• Commercial banks with 
good performance on 
material ESG issues 
outperform banks with 
bad performance on the 
same issues.
	• Good performance in 
immaterial issues does 
not lead to firm value 
destruction.
What does this mean?
Material ESG issues are 
promising signals for 
informing investment 
decisions based on 
ESG performance.
page 13
Do sustainable banks outperform?
companies
scoring 
companies in the same issues.  
is not as

Robustness tests
What is a robustness test?
The point of a robustness test is to check if the conclusions of an analysis still hold by changing 
the underlying assumptions.
Changing the time period
Our first robustness test was to eliminate the time period from 2007 to 2010. There were two 
reasons for carrying out this test: the first one was to test the validity of our results outside the 
range of the financial crisis years that had significant impact on firm’s financials, particularly for 
commercial banks. The second reason was the fact that raw data coverage improves drastically 
from 2010 onwards.
Results: Our results for the time period 2010‑2017 corroborate our main findings, as we find 
a greater difference in alphas between top and bottom materiality portfolios. In contrast, the 
difference between top and bottom portfolio for immaterial issues is slightly smaller.
Changing portfolio size
In order to test the effect of different portfolio sizes on our results, we created bigger 
portfolios to test any potential bias embedded in smaller portfolio sizes (keeping in mind 
that our sample consists of 100 banks). To do so, we constructed median portfolios where we 
defined top and bottom performers as commercial banks with a Materiality and Immateriality 
Index higher and lower, respectively, than the median value of the indexes. By increasing 
portfolio size, we anticipate two effects: an ESG effect, whereby including stocks in the 
middle of the ranking would mitigate differences in performance between top and bottom 
portfolios; and a risk effect, whereby taking bigger portfolios allows us to address excessive 
company‑specific volatility embedded in small sized portfolios.
Results: The results for the top and bottom materiality portfolio remained similar to our 
original results, suggesting that the ESG effect and risk effect are balanced out. With respect to 
the immateriality portfolios, we found that individual alpha estimates increased significantly 
compared to the original results, suggesting that the risk effect positively offset the ESG effect.
Changing stock selection and portfolio formation process
In our core analysis we selected stocks based on the absolute ranking of commercial banks in 
the Materiality and Immateriality index. As an additional test we orthogonalised 1‑year changes 
in the Materiality and Immateriality Index with respect to 1‑year changes in different firm 
characteristics over the time period of analysis. This allowed us to construct portfolios based 
on the unexplained portion of commercial banks’ Materiality and Immateriality Index scores 
using the residuals of the indexes. This approach ensures that assessment of best and worst 
sustainability performance is not biased by firm characteristics correlated to ESG practices.

Results: We found consistent differences in alphas compared to the absolute ranking approach 
of the core analysis, although individual alpha estimates and differences were both always 
smaller in magnitude.
page 14
Do sustainable banks outperform?

6. Conclusions
The work of the GABV has highlighted how value‑based banks and banking cooperatives have 
continuously demonstrated financial returns while taking a strategic longer‑term view of profit and 
prosperity. With this research we have provided more insights into the impact of improving ESG 
performance for banks on financial returns.

Our evidence supports the current thinking that adopting a strategic focus on ESG issues can lead 
to financial outperformance. We have found that commercial banks that score high on material ESG 
issues have better future performance than commercial banks that score low on the same issues. 
These results show that materiality guidance can be helpful both for investors in improving the 
informativeness of ESG data, and for commercial banks in providing a prioritisation framework for ESG 
issues.
Another important finding is that when looking at immaterial issues, although high scoring banks do 
not outperform low scoring banks, both portfolios deliver positive alpha, suggesting that investing in 
immaterial issues does not destroy firm value. Rather, banks that chose to focus on ESG issues that 
are immaterial to their industry failed to realise the same benefits as those that focused on material 
ESG issues. By contrast, there is no shortage of examples of companies where ESG shortcomings have 
caused major financial damage and destroyed company and shareholder value.
We recognise that the sample of 100 commercial banks we examine is concentrated both in terms 
of size and industry exposure, and that therefore our findings are not a recommendation for an 
investment strategy. However, we consider our evidence to be a valuable contribution in providing 
industry‑specific quantitative ESG insights.
Materiality guidance can be helpful both for investors in improving the informativeness of ESG data, 
and for commercial banks in providing a prioritisation framework for ESG issues. Given the importance 
of these ESG factors to a company’s financial performance, efforts to improve the ESG data landscape 
need to come from all actors. In this regard, the work of standards setting bodies the SASB or the 
Global Reporting Initiative is extremely valuable.
Our paper opens up many opportunities for further research:
	• One key area of inquiry is better establishing the evidence regarding the influence of material and 
immaterial ESG issues on financial performance of commercial banks. Our study is only a first step. 
	• Another area of inquiry is a better understanding as to how ESG issues have an impact on financial 
performance. 
	• A third area of inquiry involves taking a dynamic perspective and trying to understand how ESG 
issues move from immaterial to material and in which time frame. 
	• Related to this, further research is needed to understand the increasing gap between banks 
performing well on material issues and immaterial issues after 2014:
– Is it a case of capital markets becoming more informed about the effect of ESG performance and,     
as a result, pricing sustainability efforts better?
– Is it a case of better ESG data availability driving our framework’s results? 
– Or are customers, motivated by an increasing preference for sustainable products and services, 
choosing their bank based on its ESG and broader sustainability practices?
Materiality 
guidance can 
be helpful both 
for investors in 
improving the 
informativeness 
of ESG data, and 
for commercial 
banks in providing 
a prioritisation 
framework for 
ESG issues.
page 15
Do sustainable banks outperform?

7. About the authors
Sakis Kotsantonis 
Managing Partner, KKS Advisors
sakis@kksadvisors.com
Vittoria Bufalari
Associate, KKS Advisors
vittoria.bufalari@kksadvisors.com
KKS Advisors
KKS Advisors is a leading consultancy firm providing innovative solutions that enable organisations 
to capture the enduring benefits of a sustainability approach. Applying our unique, research‑backed 
approach, we work with corporations, foundations, NGOs and investors on sustainable strategies 
that deliver lasting impact. Our vision is to reshape markets, creating a world where business and 
investment decisions are made for the long term, taking environmental, social and governance factors 
into account. With offices in London, Boston and Athens, and associates around the world, our reach is 
global, and our focus is on efforts which foster systemic change.
In alphabetical order, this research benefited from the support and guidance of:
Mr. Sam Baker
Ms. Margaret Doyle
Dr. Georges Gloukoviezoff
Dr. Hakan Lucius
Mr. Richard Kibble
Dr. Adriana Kocornik-Mina
Mr. David Korslund
Prof. George Serafeim
	
page 16
Do sustainable banks outperform?

8. Research supporters
Global Alliance for Banking on Values (GABV) 
Global Alliance for Banking on Values (GABV) is a network of banking leaders from around the world 
committed to advancing positive change in the banking sector. Our collective goal is to change 
the banking system so that it is more transparent, supports economic, social and environmental 
sustainability, and is composed of a diverse range of banking institutions serving the real economy.
David Korslund
Senior Advisor (retired)
davidkorslund@gabv.org
Adriana Kocornik-Mina 
Metrics and Research Senior Manager
adriana.kocornik@gabv.org
The European Investment Bank
The European Investment Bank (EIB) is the Bank of the European Union, and is owned by the EU 
contribution to growth, employment, economic and social cohesion and environmental sustainability, 
Pascal Martino
Banking Leader & Digital co-leader 
pamartino@deloitte.lu
Hakan Lucius
Head, Corporate Responsibility and Civil Society
h.lucius@eib.org
Local contacts 
Deloitte
select clients. In today’s business environment, organisations are beginning to realise that balancing 
industry specialists provide comprehensive, integrated solutions to the banking, insurance, capital 
markets and investment management sectors. We help you meet goals, plan new strategies and keep 
you up to date on the changes in regulation and customer expectations. Discover more reports like 
this at Deloitte.co.uk/FS
Richard Kibble
Partner and Head of Strategy 
Financial Services Consulting
rkibble@deloitte.co.uk
Sam Baker  
Partner and Head of Purpose  
Consulting 
sambaker@deloitte.co.uk
Benoit Sauvage
Director – RegWatch
Strategy and Consulting
bsauvage@deloitte.lu
page 17
Do sustainable banks outperform?

9. Appendix: List of banks
Al Rajhi Banking and Investment Corporation
Australia and New Zealand Banking Group Ltd
Axis Bank Limited
Banco Bilbao Vizcaya Argentaria, S.A.
Banco Bradesco S.A.
Banco do Brasil S.A.
Banco Santander (Brasil) S.A.
Banco Santander, S.A.
Bank of America Corporation
Bank of Beijing Co., Ltd.
Bank of China Limited
Bank of Communications Co., Ltd.
Bank of Montreal
Barclays PLC
BB&T Corporation
BNP Paribas SA
BOC Hong Kong (Holdings) Limited
CaixaBank, S.A.
Canadian Imperial Bank of Commerce
Capital One Financial Corporation
China CITIC Bank Corporation Limited
China Construction Bank Corporation
China Merchants Bank Co., Ltd.
China Minsheng Banking Corp., Ltd.
Citigroup Inc.
Comerica Incorporated
Commonwealth Bank of Australia
Credicorp Ltd.
Crédit Agricole S.A.
Danske Bank A/S
DBS Group Holdings Ltd
Deutsche Bank Aktiengesellschaft
Discover Financial Services
DNB ASA
Fifth Third Bancorp
FirstRand Limited
Grupo Financiero Banorte, S.A.B. de C.V.
Hang Seng Bank Limited
HDFC Bank Limited
HSBC Holdings plc
Huntington Bancshares Incorporated
ICICI Bank Limited
Industrial and Commercial Bank of China Limited
Industrial Bank Co., Ltd.
Intesa Sanpaolo S.p.A.
Itaú Unibanco Holding S.A.
JPMorgan Chase & Co.
KBC Group NV
KeyCorp
Kotak Mahindra Bank Limited
Lloyds Banking Group plc
M&T Bank Corporation
Malayan Banking Berhad
Mercantil Servicios Financieros, C.A.
Mitsubishi UFJ Financial Group, Inc.
Mizuho Financial Group, Inc.
National Australia Bank Limited
National Bank of Canada
Natixis S.A.
Northern Trust Corporation
Oversea‑Chinese Banking Corporation Limited
Ping An Bank Co., Ltd.
PT Astra International Tbk
PT Bank Central Asia Tbk
PT Bank Mandiri (Persero) Tbk
PT Bank Rakyat Indonesia (Persero) Tbk
Public Bank Berhad
Qatar National Bank (Q.P.S.C.)
Regions Financial Corporation
Royal Bank of Canada
Shanghai Pudong Development Bank Co., Ltd.
Skandinaviska Enskilda Banken AB (publ.)
Société Générale Société anonyme
Standard Bank Group Limited
Standard Chartered PLC
State Bank of India
State Street Corporation
Sumitomo Mitsui Financial Group, Inc.
SunTrust Banks, Inc.
SVB Financial Group
Svenska Handelsbanken AB (publ)
Swedbank AB (publ)
The Bank of New York Mellon Corporation
The Bank of Nova Scotia
The PNC Financial Services Group, Inc.
The Royal Bank of Scotland Group plc
The Toronto‑Dominion Bank
U.S. Bancorp
UniCredit S.p.A.
United Overseas Bank Limited
Wells Fargo & Company
Westpac Banking Corporation
page 18
Do sustainable banks outperform?

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Do sustainable banks outperform?

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