CC BY
12DOI: 10.29141/2658-5081-2023-24-3-4 EDN: DUFWNF JEL classification: G21, G23, B26
Larisa I. Yuzvovich Ural State University of Economics, Ekaterinburg, Russia Maksim S. Maramygin Ural State University of Economics, Ekaterinburg, Russia Mayya I. Lvova Ural State University of Economics, Ekaterinburg, Russia
The impact of ESG factors on Russia's banking sector
Abstract. An important condition for the successful incorporation of ESG principles in banks' activity is reflecting the data on the implementation of environmental, social and governance activities in the reporting for stakeholders. The paper aims to build the models of ESG factors' impact on the banking industry. Methodologically, the study rests on the theories of ESG banking and green (responsible) finance and uses the methods of dialectical and economic statistical analysis. By means of correlation analysis the authors reveal causal relationships and establish the ESG factors affecting the banking sector of the Russian Federation. The obtained data point to the importance of green finance within the framework of the sustainable environmental and economic development of the banking industry. The study does not fully confirm the thesis that following the ESG principles will lead to an increase in the profitability and efficiency of the banking sector: only social factors directly influence the performance of the banking sector, while environmental factors have an inverse effect, and there is no relationship with the governance factors. The findings can be useful while incorporating ESG principles in the regulation of financial markets and in investment practices. This will enable the organisations in the banking sector to form an ESG-based strategy, control the factors affecting the financial sustainability of the baking industry, manage ESG risks based on an extensive dialogue with stakeholders, and win goodwill.
Keywords: ESG; banking sector; banking; performance; sustainable development; Russia.
For citation: Yuzvovich L. I., Maramygin M. S., Lvova M. I. (2023). The impact of ESG factors on Russia's banking sector. Journal of New Economy, vol. 24, no. 3, pp. 74-90. DOI: 10.29141/2658-5081-2023-24-3-4. EDN: DUFWNF.
Article info: received November 15, 2022; received in revised form February 28, 2023; accepted June 16, 2023
Introduction
Emerging requirements of regulators and expectations of stakeholders urge banks to actively implement ESG practices. Companies, who understand their ESG risks and opportunities, are more competitive in the long term [Lvova, Voronova, 2018; Vysokov, 2020; Voronova, Lukina, 2022; Gruzdeva, Zaborovskaya, 2022]. In the banking sector, it is beneficial to improve the sustainability of their operations to meet stakeholders' expectations, as well as to incorporate ESG factors into the lending process as part of risk management and new service development. "However, it is important to remember that ESG financing is not charity, but full-fledged commercial products for banks," says Perizat Shaikhina, the first deputy chairman of Rosbank's board, "with their help, banks get better new borrowers, expand the product line for existing customers, and increase their own ESG-ratings"1 (cf.: [Vostrikova, Meshkova, 2020; Trifonova, Gaydaev, 2021]).
The purpose of the study is to assess the impact of ESG factors on the Russian banking sector using the correlation analysis method.
In order to achieve the purpose, we set the following objectives:
- to give a detailed description of ESG banking;
- to study the impact of ESG factors on the performance of credit institutions in terms of the Russian banking market and Russian ESG indicators;
- to build models that estimate the performance of the banking sector taking into account the following factors: life expectancy at birth, CO2 emissions, assessment of political stability, and the proportion of the population aged 65 and above.
Theoretical foundations of studying the ESG banking concept
Let us clarify the financial nature of ESG banking, which has not yet received a generally accepted definition in the economics. Thus, the Association of Banks of Russia says that "ESG banking covers banks' practical activities on implementing the principles of environmental, social and governance responsibility" and "aggregates the concepts of financial influence, green, responsible, social, sustainable and ethical banking that emerged as an alternative to speculative banking, including the implementation of the sustainable development goals and national goals and the impact on solving environmental and socioeconomic problems"2.
Academic specialists and practitioners from the banking industry deal with issues of green financing3 [Berezina, 2017; Lvova, 2019; Petrenko, 2020; Ferrari, Nispi Landi,
1 Very good money. Kommersant, 2021, March 5. https://www.kommersant.ru/doc/4713497. (In Russ.)
2 Association of Banks of Russia. (February, 2021). Practical recommendations of the banking community on the implementation of ESG banking in Russia. 14 p. https://asros.ru/upload/iblock/160/PRAKTICHESKIE-REK0MEN-DATSII-BANKOVSKOGO-SOOBSHCHESTVA-PO-VNEDRENIYU-ESG_BANKINGA-V-ROSSII.pdf. (In Russ.)
3 Working Group on Responsible Financing (ESG finance) of the Expert Council on the Long-Term Investment Market at the Bank of Russia. (2019). The concept of organising a methodological system in Russia for the development of green finance tools and responsible investment projects. 87 p. https://cbr.ru/Content/Document/ File/84163/press_04102019.pdf (In Russ.); VEB.RF. Green financing. https://veb.ru/ustojchivoe-razvitie/zeljonoe-finansirovanie/. (In Russ.)
2020]. Vasily Vysokov, the chairman of Center-invest Bank's board, notes that ESG banking actually combines numerous ideas about modernised banking that complement each other and were designed for using contemporary tools, mechanisms and methods for managing banking activities1 [Vysokov, 2020].
Deloitte experts believe that ESG banking is a banking concept based on the principles of environmental, social and corporate responsibility for the benefit of present and future generations, as well as the practical implementation of initiatives to achieve the sustainable development goals and other socially significant values2 [Cor-nett, Erhemjamtsa, Tehranian, 2016; Pasenov, 2017; Urazova, 2020].
Thus, ESG banking, unlike other banking business models (state, speculative, sustainable and Islamic), is aimed at long-term profit in the real sector of economy based on the business development of clients and regions where business operates, self-regulation in risk management and personnel training, compliance with legislation and world best practices3 [Bataeva, 2015; Belousov, 2015; Avis, 2019; Izmaylov, Pu-pentsova, 2022].
It is important that owners and management independently choose whether to follow the ESG principles in conditions when the declared social values do not have legislative and regulatory grounds sufficient for direct accounting in financial indicators. Therefore, ESG banking requires creative actions to achieve socially significant goals in the situation of designing legislative and regulatory framework to resolve inconsistencies in legislative, regulatory and supervisory requirements.
The Association of Banks of Russia distinguishes between the following two main advantages of ESG banking over other banking models4:
- using a wider range of alternatives and creative action tools to accelerate adaptation to constant challenges in continuous crises;
- attracting new clients and investors, implementing new technologies, rules, markets and products due to a reputation developed in environmental, social and governance responsibility spheres [Dvoryadkina, Kvon, 2020].
Unlike speculative banking, which deals with buying and selling risks, ESG banking manages risks. In a crisis, a banker-speculator buys more expensive resources and shifts the risks to a client by raising interest rates on loans. An ESG bank, together with a client, considers risk mitigation measures, which allows lowering lending rates,
1 Vysokov V. V. (2020). ESG regulation of financial markets. Banking Review, January 16. https://bosfera.ru/bo/ esg-regulirovanie-finansovyh-rynkov. (In Russ.)
2 ESG banking in Russia: Deloitte study. May, 2021. 60 p. https://www2.deloitte.com/ru/ru/pages/research-cent-er/articles/2021/esg-banking-russia.html (In Russ.); cf.: Global Sustainable Investment Alliance (GSIA). (2018). Global sustainable investment review. 29 p.; United Nations Environment Programme Finance Initiative (UNEP FI). Principles for responsible banking. https://www.unepfi.org/banking/bankingprinciples/.
3 Katasonova Yu. Yu., Mitrofanov P. S. (2021). The future of the sustainable financing market in the Russian Federation: Banks shape the market. Expert RA, March 31. https://raexpert.ru/researches/sus_dev/esg2021//. (In Russ.)
4 Association of Banks of Russia. (February, 2021). Practical recommendations of the banking community on the implementation of ESG banking in Russia. 14 p. https://asros.ru/upload/iblock/160/PRAKTICHESKIE-REK0MEN-DATSII-BANKOVSKOGO-SOOBSHCHESTVA-PO-VNEDRENIYU-ESG_BANKINGA-V-ROSSII.pdf. (In Russ.)
maintaining a client's competitive advantages on the market and paying off the loan on time and in full [Ivanitskiy, Petrenko, 2020; Ovechkin, 2021].
The ESG banking business model considers a wider range of risks:
- environmental, including physical (natural disasters and climate change) and transformational (legislative changes)1;
- social (differentiation by income level, gender, age and other characteristics, availability of new technologies and resources);
- governance (transparency, efficiency, monitoring and reporting of the reproduction processes of all types of capital - production, financial, human, social, informational, intellectual and natural) [Kanaev, Kanaeva, 2018; Skobarev, Savitskaya, Pert-seva, 2020].
Banks' office work is unlikely to directly damage nature, especially when switching from paper to electronic document management, but their lending activity can significantly affect the development of some economic sectors. The provision of borrowed resources for constructing and expanding factories that pollute the environment and violate social and corporate ethics negatively affect the economic performance of borrowers as well. However, climate change as a result of their operating can significantly complicate main activities of such borrowers, and the negative attitude of buyers to these companies' activities can reduce sales and the level of collateral for loans due to deterioration in the collateral quality (for example, the condition of land plots, the ability to produce goods) and decrease in the capitalisation of a company (in case a borrower's shares are pledged). As a result, such a lending object will become risky in terms of returning provided funds. And such risks are very significant: in September 2018, the Moody's agency in a global review determined that debts subject to ESG risks amounted to 1.157 trillion US dollars [Smirnov, 2020].
The indicated risks, which can cause the non-repayment of loans and an increase in provisions for them, pose a significant threat to the financial position of banks, which, in order to eliminate it, are forced to change their credit policy. Thus, the European Investment Bank (EIB) announced in 2019 that it would stop lending to companies working with hydrocarbon raw materials, even gas. "From a political and banking point of view, it does not make sense to continue investing in assets with a service life of 20-25 years, which will be replaced by new technologies and do not contribute to the achievement of the EU's ambitious climate and energy goals,"2 explained Andrew McDowell, the EIB Vice President. In January 2020, a group of Barclays shareholders called on the British bank to gradually stop lending to projects and companies related to fossil raw materials [Smirnov, 2020].
1 European Central Bank. (2020). Guide on climate-related and environmental risks: Supervisory expectations relating to risk management and disclosure. 47 p. https://www.bankingsupervision.europa.eu/legalframework/pub-liccons/pdf/climate-related_risks/ssm.202005_draft_guide_on_climate-related_and_environmental_risks.en.pdf
2 Overchenko M. (2020). What will happen with the fossil fuel sector. Vedomosti, January 23. https://www. vedomosti.ru/economics/articles/2020/01/22/821275-sektor-iskopaemogo. (In Russ.)
The Association of Banks of Russia believes that "ESG reporting policies and procedures require public, regular disclosure of significant information on the implementation of the ESG strategy and risk management"1. Thus, ESG reporting should be:
- essential;
- reliable;
- balanced (including positive and negative facts);
- clear;
- comprehensive but to the point;
- outlining perspective;
- stakeholder-oriented;
- consistent;
- comparable;
- available (one click at maximum)2.
These reports should disclose information on environmental, social and governance issues, compliance with regulatory requirements and legislation, necessary to understand the development of a bank and a business model used.
The most frequently used practical approaches to ESG reporting include the Recommendations of the Task Force on Investment Climate-Related Financial Disclosure (TCFD), the Global Reporting Initiative (GRI), the CDP, the Sustainable Development Accounting Standards Board (SASB), the International Integrated Reporting (IIRC), the EU Environmental Management and Audit Scheme (EMAS), including the Impact Management Project (IMP), ICMA principles and Nasdaq guidelines.
Customer trust, good reputation and profitability are the main success factors for a credit institution in the modern world. Following the ESG principles definitely helps to increase competitiveness in the first two factors. However, the impact of ESG factors on the financial performance of banks has not been clearly confirmed. Let us review the papers showing how environmental, social and governance factors affect the financial performance of banks.
A great number of researchers determined the ESG impact on the performance of banks in various countries. For instance, a study of 882 banks' activities from developed and developing countries over the 11 years after the 2008 financial crisis, using regression models, concluded that ESG improves banks' accounting and market-based performance in developed countries, supporting value creation theory. Using pooling regression and instrumental variable - generalised method of moments, this study finds that ESG weakens banks' performance in developed and developing countries [Buallay et al., 2021].
1 Association of Banks of Russia. (February, 2021). Practical recommendations of the banking community on the implementation of ESG banking in Russia. 14 p. https://asros.ru/upload/iblock/160/PRAKTICHESKIE-REKOMEN-DATSII-BANKOVSKOGO-SOOBSHCHESTVA-PO-VNEDRENIYU-ESG_BANKINGA-V-ROSSII.pdf (In Russ.).
2 Ibid.
Researchers established a relationship between the corporate social responsibility (CSR) of banks and their financial performance. They concluded that, in general, banks are rewarded for higher social responsibility, since financial results are positively and significantly associated with CSR indicators [Buallay et al., 2021]. Other scientists came to similar conclusions [Esteban-Sanchez, Cuesta-Gonzalez, Paredes-Gazquez, 2017].
By using the meta-analysis, we conclude that there is an impact of ESG indicators on the performance of different companies, including banks. This relationship is positive, statistically significant, but economically very weak; the ESG impact on financial results is not a priority. It was found that the "E" component has the greatest influence on these results, while the "S" and "G" components are not so significant [Huang, 2021].
This study also raises questions of studying the ESG impact on companies' performance. Firstly, in practice, the motivation for following ESG can be different, which creates theoretical and methodological problems in determining the relationship between ESG and financial results. Secondly, scientists are not unanimous concerning what each ESG indicator includes, and this makes it difficult to compare and generalise the results [Huang, 2021].
We believe that upholding the ESG principles by a credit institution covers several moments.
1. A bank's obligations for environmental protection:
- efficient use of resources within a bank itself;
- financing environmentally friendly industrial projects;
- reducing risks of lending to 'dirty' industries.
2. The social responsibility of a bank:
- financial accessibility for the majority of society;
- financing non-governmental organisations, ethical investment funds;
- risk assessment for clients;
- profitability of electronic payments;
- financial education for the population.
3. The quality of governance is the combined effect of many factors, such as the size of the board of directors, the competence and experience of a director, their independence, cultural diversity and gender equality of the board members, performing responsibilities of a general director and chairman by different people, remuneration of the chief executive officer and risk management [Batae, Dragomir, Feleaga, 2021].
A bank must be able to meet its environmental obligations, take initiatives in social responsibility and implement a corporate governance quality policy when interacting with customers and business partners. The environmental responsibility and policy of the banking sector's institutions contribute to the growth of reputational capital, which is directly related to the increase of the banking business capitalisation and its
competitiveness. The ideal scenario would be to implement the highest quality corporate governance standards while reducing environmental impact and participating in social responsibility programmes [Giuzio et al., 2019; Batae, Dragomir, Feleaga, 2021].
In the Russian Federation, a fairly wide range of organisations are promoting ESG principles. The Russian Union of Industrialists and Entrepreneurs (RUIE) organised the assurance of public non-financial reports of companies, maintains a register of reports and prepares analytical reviews of non-financial reports. The RUIE sustain-ability indices are used by exchange-traded funds (ETFs).
At the initiative of Center-Invest Bank, the section "Risk management, financial stability of the banking system and ESG banking" was included into the Main directions for the activities of the Association of Banks of Russia for 2020-2022. The Russian Federation presented the Voluntary National Review of the Implementation of the 2030 Agenda for Sustainable Development and the Citizens' Review of the Implementation of the Sustainable Development Goals (SDGs) in Russia. The Accounts Chamber of the Russian Federation has developed the sustainable development goals bulletin, which mentions the first regional review The Rostov oblast: Moving towards Sustainable Development Goals. The regional review of the achievement of the SDGs confirmed the competitive advantages of the south of Russia in solving global problems. The Working Group on responsible financing of the Expert council on the long-term investment market at the Bank of Russia has developed the Concept for the organisation in Russia of a methodological system for the development of green financial tools and responsible investment projects [Khutorova, Khutorov, 2021; Gruzdeva, Zaborovskaya, 2022].
A comprehensive research on this topic, carried out in 2020, investigates the relationship between the environmental, social and financial performance of banks [Batae, Dragomir, Feleaga, 2021]. Having analysed information about 104 European banks in the Refinitiv database, the researchers selected 39 banks which had ESG reporting data (for at least one indicator from the dimension) for at least 5 years within the 2010-2019 period. The regression analysis revealed that the combined ESG indicator from the specified database is insignificant, i.e., it does not affect the financial performance of the selected banks, both in the year-on-year regression model and in the year-lag model. A similar situation is observed when using three separate ESG scores from the Refinitiv database. Regression models which used the dimensions created by the authors on the basis of real indicators (related to ESG) showed better results.
Russian banks have begun to implement ESG standards and are increasingly discussing them. In October 2020, Sergey Shvetsov, first deputy chairman of the Central Bank, noted that 6 out of 11 systemically important banks take into account the ESG principles in credit policy and corporate strategy. These banks are Sberbank, Gazprombank, Rosbank, Credit Bank of Moscow (MKB), Sovcombank and Center-invest1.
1 The Central Bank of the Russian Federation sees an increase in the attention of the largest banks to ESG. Interfax-TsRKI. October 28, 2020. https://www.e-disclosure.ru/vse-novosti/novost/4610?attempt=2. (In Russ.)
Certainly, the implementation level of environmental, social and governance standards in Russia is low, especially in comparison with EU countries, although these standards are actively developing as the cost of ESG risks increases. At the same time, banks are still cautious: fossil fuel producers, for example, are large taxpayers and employers, therefore their funding is unlikely to be limited for social, political or commercial reasons1.
MKB has become the leader among the largest banks in ESG assessment. It interacts with international banks for development concerning ESG. With the support of international financial institutions such as the EBRD and IFC, the bank has developed its own environmental and social management policy, which classifies all bank borrowers according to their ESG risks. Moreover, in the MKB there is an exclusion list - a list of projects and industries that the bank refuses to finance. MKB implements green finance projects and has its own ESG strategy. In addition, it is actively working on its own impact on the environment and society, in particular by implementing the concept of green banking.
Materials and methods
Currently, there are not detailed studies on the impact of ESG factors on the Russian credit institutions' performance. This is due to the fact that Russian companies have just started following ESG principles, a very limited number of economic participants disclose non-financial reporting, and there is not enough information. The World Bank (WB) monitors the way countries are moving towards achieving sustainable development goals, and for this purpose it collects ESG information. In total, the ESG data bank of the World Bank contains 67 indicators2, but not all of them have information, and the available data are not always of high quality. Thus, data for Russia are supported mainly from 2000 to 2019.
We take this 20-year period and perform a correlation-regression analysis using a multiple linear regression model of the following form:
Y = p1 *1 + p2 *2 + ... + Pk + U,
where Y is dependent variable; U is a random component of the model; xk are independent variables showing how individual financial ESG indicators affect the indicators of the banking sector.
We take 3 indicators as Y variables (the data for them come from the Bank of Russia3):
- net profit of the banking sector before tax, received in the corresponding year by operating credit institutions;
1 Krechetova A. (2021). "Green colour mood": Which Russian bank implements ESG standards. Frank Media: Online Edition, February 2. https://frankrg.com/36127. (In Russ.)
2 The World Bank Group. Environment Social and Governance (ESG) Data. https://databank.worldbank.org/ source/environment-social-and-governance-(esg)-data.
3 Bank of Russia Statistical Bulletins for 2001-2020. https://www.cbr.ru/eng/statistics/bbs/.
Table 1. Indicators of the Russian banking industry and Russia's ESG indicators
Indicator, unit of measurement [ESG component] 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
C02 emissions, tonnes per capita [E] 10.6 10.7 10.7 11.1 11.1 11.3 11.7 11.7 12.0 11.0 11.7 12.3 12.6 12.1 12.1 11.8 12.0 12.0 12.0 12.0
Depletion of natural resources, % of GNI [E] 9.3 8.2 7.8 8.4 8.6 9.5 10.1 8.7 9.5 7.5 8.1 9.4 8.5 7.6 7.3 5.3 4.6 5.6 8.4 7.4
Percentage of energy consumed that comes from renewable sources, % of total energy consumption [E] 3.5 3.6 3.5 3.3 3.6 3.6 3.5 3.7 3.3 3.6 3.3 3.2 3.4 3.7 3.4 3.3 3.3 3.3 3.3 3.3
Percentage of energy consumed that comes from fossil sources, % of total energy consumption [E] 91.1 90.9 90.8 90.9 90.7 90.7 90.6 90.5 90.9 90.2 90.5 90.9 90.9 89.5 92.1 92.1 92.1 92.1 92.1 92.1
Anti-corruption measures, WB assessment [G] -1.0 -1.0 -0.9 -0.8 -0.8 -0.8 -0.9 -1.0 -1.1 -1.1 -1.1 -1.1 -1.0 -1.0 -0.9 -0.9 -0.8 -0.9 -0.8 -0.8
Political stability and absence of violence/ terrorism, WB assessment [G] -1.4 -1.4 -0.7 -1.2 -1.5 -1.3 -0.9 -0.9 -0.7 -1.0 -0.9 -1.0 -0.8 -0.7 -0.9 -1.0 -0.9 -0.6 -0.5 -0.5
Regulatory quality, WB assessment [G] -0.6 -0.6 -0.2 -0.2 -0.1 -0.1 -0.4 -0.3 -0.4 -0.3 -0.4 -0.3 -0.3 -0.4 -0.4 -0.5 -0.4 -0.5 -0.5 -0.4
Rule of law, WB assessment [G] -1.1 -1.1 -0.8 -0.9 -0.9 -0.9 -1.0 -1.0 -1.0 -0.8 -0.8 -0.7 -0.8 -0.8 -0.7 -0.8 -0.8 -0.8 -0.8 -0.7
Life expectancy at birth, years [S] 65.5 65.4 65.1 65.0 65.5 65.5 66.7 67.6 67.9 68.7 68.8 69.7 70.1 70.6 70.7 71.2 71.7 72.5 72.7 73.1
Share of population aged 65 years and above, % [S] 12.4 12.7 13.1 13.6 13.8 13.8 13.8 13.7 13.4 13.2 13.1 13.1 13.1 13.2 13.4 13.6 13.9 14.3 14.7 15.1
Proportion of economically active females, % [S] 79.1 79.1 80.5 80.7 81.1 81.4 81.8 81.3 80.0 80.3 79.5 79.6 79.4 78.7 78.4 77.9 77.9 77.8 78.1 78.2
Gini index, WB assessment [S] 37.1 36.9 37.3 40.0 40.3 41.3 41.0 42.3 41.6 39.8 39.5 39.7 40.7 40.9 39.9 37.7 36.8 37.2 37.5 37.5
Share of the population that started using the Internet in the corresponding year, % [S] 2.0 1.0 1.2 4.2 4.6 2.4 2.8 6.6 2.2 2.2 14.0 6.0 14.8 4.2 2.6 -0.4 3.0 2.9 4.9 1.8
Net profit of the current year before tax, billion rubles 17.2 67.6 93.0 128.4 177.9 262.1 371.5 508.0 409.2 205.1 573.4 848.2 1011.9 993.6 590.0 192.0 929.7 789.7 1,344.8 2,036.8
ROA, % 0.7 2.1 2.2 2.3 2.5 2.7 2.6 2.5 1.5 0.7 1.7 2.0 2.0 1.7 0.8 0.2 1.2 0.9 1.4 2.1
ROE, % 8.6 24.8 16.0 15.7 18.8 21.1 21.9 19.0 13.6 5.6 13.6 17.7 17.8 15.4 8.7 2.6 11.3 9.1 15.0 21.2
Source: Tables 1-3 are compiled based on the data from Bank of Russia Statistical Bulletins for 2001-2020. https://www.cbr.ru/eng/statistics/bbs/; Development strategy of Sber Group until 2023. 2020. 43 p. https://www.sberbank.com/common/img/uploaded/files/info/sber_investor_day-strategy_2023_ru.pdf.
ROE ROA Net profit of the current year before tax Share of the population that started using the Internet in the corresponding year Gini index Proportion of economically active females Share of population aged 65 years and above Life expectancy at birth Rule of law Regulatory quality Political stability and absence of violence/ terrorism Anti-corruption measures Percentage of energy consumed that comes from fossil sources Percentage of energy consumed that comes from renewable sources Depletion of natural resources C02 emissions Indicators
-0.06 -0.12 0.71 0.43 0.25 i o o 0.37 0.77 0.62 -0.12 0.62 i o M OJ 0.28 i o i o M 1.00 C02 emissions
0.57 0.60 -0.21 0.20 0.57 0.71 -0.24 -0.59 -0.50 0.28 -0.24 -0.20 -0.54 0.25 1.00 i Depletion of natural resources
0.26 0.27 -0.35 i o K 0.35 0.43 i o K i o i o 0.21 i o -0.15 -0.66 1.00 i i Percentage of energy consumed that comes from renewable sources
-0.32 -0.46 0.38 -0.27 -0.61 -0.67 0.53 0.58 0.28 -0.46 0.26 0.45 1.00 i i i Percentage of energy consumed that comes from fossil sources
0.21 0.26 0.15 i o K -0.27 -0.03 0.60 -0.01 0.01 0.26 -0.12 1.00 i i i i Anti-corruption measures
oro- i o M OJ 0.70 0.13 -0.05 i o 0.53 0.70 0.56 -0.23 1.00 i i i i i Political stability and absence of violence/ terrorism
0.28 0.59 -0.22 0.21 0.60 0.69 0.03 -0.45 0.11 1.00 i i i i i i Regulatory quality
-0.35 -0.28 0.57 0.21 -0.07 i o 0.40 0.73 1.00 i i i i i i i Rule of law
-0.35 i o 0.80 OI'O -0.27 -0.78 0.55 1.00 i i i i i i i i Life expectancy at birth
0.15 0.13 0.67 -0.15 -0.11 -0.20 1.00 i i i i i i i i i Share of population aged 65 years and above
0.46 0.69 -0.52 0.10 0.68 1.00 i i i i i i i i i i Proportion of economically active females
0.26 0.45 i o M 0.35 M O O i i i i i i i i i i i Gini index
0.18 0.25 0.24 1.00 1 i i i i i i i i i i i Share of the population that started using the Internet in the corresponding year
0.17 0.02 1.00 i 1 i i i i i i i i i i i Net profit of the current year before tax
0.92 1.00 i i 1 i i i i i i i i i i i ROA
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- return on assets of the banking sector (ROA);
- return on equity of the banking sector (ROE).
Accordingly, it is necessary to build 3 regression models, which will help to qualitatively assess the impact of ESG indicators on various banking aspects. It does not make any sense to use national indicators (GDP) and other banking indicators as independent variables, since the indicated influence will be tested in general and only within one country. Out of 67 indicators provided by the World Bank, we will take only those indicators that have been available for at least 15 years as factors, otherwise the already insignificant sample will become even less qualitative. Thus, 39 indicators remained.
Next, we exclude indicators for which the data practically does not change in the observed period (for example, the share of the population with access to electricity is constantly 100 %), since they will not be significant in the regression model. Let us use the indicators that most fully reflect the ESG principles. In total, there were 20 of them, including:
- by component E - 7;
- by component S - 8;
- by component G - 5.
However, some of these indicators are highly correlated with each other. Such multicollinearity in building a regression model can lead to various kinds of errors. Therefore, we exclude indicators which correlation modulo is much higher than 0.7. One indicator has been modified to eliminate multicollinearity - the share of the population that started using the Internet in the corresponding year. The total number of factors is 13, including 4 factors for the E component, 5 factors for the S component, and 4 factors for the G component (Table 1).
Research results
First of all, we will perform a correlation analysis of the 13 indicators with the selected independent variables. The results of the correlation analysis are presented in Table 2.
Several factors (highlighted in Table 2) have a strong correlation with the selected dependent variables. Thus, life expectancy at birth, CO2 emissions, assessment of political stability and the share of the population aged 65 years and above are strongly correlated (correlation coefficient modulo is close to 0.7 and higher than this value) with the indicator of net profit before tax of the banking sector. At the same time, the relationship with all four factors is direct, i.e., with an increase in the factor, the dependent variable also rises.
It is possible to explain these correlations economically. The increase in CO2 emissions contributes to the growth of the banking sector's profits, since it occurs due to the growth in production, followed by an increase in the lending volume, and hence the bank profits. Life expectancy and the share of the population aged 65 and above
are positively correlated with bank profits, since the longer people live, the more loans they take, which also leads to an increase in bank profits. Political stability is associated with profit growth for the reason that it creates conditions when banks do not need to spend resources on restructuring the system in accordance with new legal requirements and, accordingly, costs are going down and profits are going up.
Another indicator that has strong correlation with ESG factors, in particular with the indicator "the proportion of economically active females", is the return on assets. It is directly related to the size of bank profits due to the fact that the alignment of gender equality in the labour market leads to an increase in the efficiency of the entire market, there are more creditworthy people (due to employed females), it contributes to a rise in GDP and the number of citizens using credit, and then increase in the profits of credit institutions.
The rest of the ESG factors are not as strongly correlated with the dependent variables. We found moderate correlation between the net profit of the banking sector and the rule of law (direct relationship), the proportion of economically active females; between the return on assets and the depletion of natural resources, the regulatory quality (direct relationship), life expectancy at birth (inverse relationship), Gini index (direct relationship); between the return on equity and the depletion of natural resources (direct relationship), the proportion of economically active females and return on assets (direct relationship). Correlation with other indicators is weak.
Let us carry out a regression analysis on the data obtained. We build the first model, taking the amount of the banking sector's profit as a dependent variable. The determination coefficient of the resulting model was 0.76, the reliability of the model in terms of the significance level of the Fisher criterion was 0.0015, which is lower than 0.05. This indicates the high accuracy of the approximation, the quality and significance of the model, i.e., its applicability. The obtained coefficients of the regression equation and the P-values of the coefficients are shown in Table 3.
Judging by the data obtained from the constructed regression model, only one indicator is significant at the level of 0.05 - the depletion of natural resources (% of GNI). At the same time, the relationship between this indicator and profit is direct. At a significance level of 0.1, there is another indicator - the Gini index. The remaining factors, based on the regression model, do not affect the banking sector's profit (or this effect is insignificant).
When constructing the second model, the return on assets of the banking sector was taken as a dependent variable. The normalised coefficient of determination of this model was 0.82, its reliability in terms of the significance level of the Fisher criterion was 0.000099, which is lower than 0.05. Thus, the model is qualitative and significant. The second model turned out to be of better quality. Four indicators appeared to be significant (i.e., with a significant probability affecting the return on assets of the banking sector): the CO2 emissions, the percentage of energy consumed that comes
Table 3. Results of the regression analysis
Independent variable Dependent variable
net profit return on assets return on equity
coefficient P-value, % coefficient P-value, % coefficient P-value, %
CO2 emissions 311.47 42.82 1.88 1.21 18.94 1.68
Depletion of natural resources 193.70 3.69 0.10 42.85 1.44 28.13
Percentage of energy consumed that comes from renewable sources 602.51 45.07 2.78 4.49 32.04 3.58
Percentage of energy consumed that comes from fossil sources -98.35 49.64 -0.05 82.87 0.54 81.77
Anti-corruption measures -258.23 85.03 -1.23 55.53 -22.76 32.72
Political stability and absence of violence/ terrorism 135.72 71.14 0.02 96.52 -2.80 64.26
Regulatory quality 2,023.61 21.09 0.67 77.18 -0.44 98.58
Rule of law -1,300.28 46.99 1.01 70.66 9.74 73.71
Life expectancy at birth 169.55 35.09 -0.51 8.79 -5.12 10.81
Share of population aged 65 years and above 240.48 46.94 1.07 5.83 11.66 5.80
Proportion of economically active females -73.33 59.25 0.13 53.92 -0.48 82.78
Gini index -185.88 9.70 -0.41 2.60 -4.10 3.65
Share of the population that started using the Internet in the corresponding year 10.39 63.31 0.04 26.82 0.27 46.03
from renewable sources, the proportion of economically active females, and the Gini index. At the same time, according to the regression model, the Gini index affects the return on assets of the banking sector inversely, and the other 2 factors - directly.
Let us construct the third model, where we take the return on equity of the banking sector as a dependent variable. The normalised coefficient of determination is 0.79, the reliability of the model in terms of the significance level of the Fisher criterion is 0.00038, which is lower than 0.05. Therefore, the model is qualitative and meaningful, and its results are similar to those of the second model. The same factors are significant with the same relationship, since the return on assets of the banking sector and the return on equity of the banking sector are interconnected and have a correlation of 0.92.
The results obtained are presented in Table 3. Thus, according to the constructed regression hypotheses, the banking market of the Russian Federation is affected by ESG indicators, but only by the first two components: environmental and social. However, this influence turned out to be non-obvious and contradictory.
Thus, the depletion of natural resources has a direct impact on the profit of the banking sector, i.e., with its growth, the profit grows as well. This could mean that the key clients are resource companies, banks receive the main profit from them. Russia
is still dependent on raw materials export. The direct impact of CO2 emissions on the return on assets and equity of the banking sector suggests the same: at the moment, the country is not ready for a sharp transition to carbon neutrality, and if this happens, the profitability of the banking sector will fall dramatically.
Another relationship looks more encouraging: the share of consumed energy from renewable sources directly affects the return on assets and equity of the banking sector. This relationship indicates that more and more energy in Russia is produced using renewable energy sources, the country is gradually switching to safe methods of generating energy, and enterprises' efficiency does not decrease in this case, judging by the growth in the return on assets and equity in the banking sector.
Another indicator that affects the results of banking activity is the Gini index. It affects the return on assets and equity of the banking sector inversely, i.e., with a decrease in this index (respectively, with a decrease in economic inequality), profitability increases. Reducing economic inequality to a moderate level contributes to a more efficient distribution of resources, an increase in social stability, which affects the economic efficiency of all economic agents in the market, including banks.
Thus, the conducted study does not fully confirm the thesis that following the ESG principles will lead to an increase in the profitability and efficiency of the banking sector. According to the data obtained, only social factors directly affect the performance of the banking sector, while environmental factors have an inverse effect. Judging by the constructed models, the factors of governance do not affect the studied dependent variables.
This shows directly whether and how ESG factors affect the banks' activities in Russia. The data are still insufficient. In addition, regression analysis as a research method has a number of problems and constraints. The first problem is that even in the presence of a stable relationship, it is not always possible to draw any conclusions about the presence of a causal relationship. The second problem is that in order to prolong the trend in the financial stability of the banking sector, it is necessary to comply with the model of stability over time, according to which only the variables under study change over time, while the rest ones remain constant.
Conclusion
The problems of sustainable development and following the ESG principles are among the most discussed issues of the last two decades. They affect important areas of life for all people on the planet, including effective management of business, for these principles were formulated to make sustainable development as important as profit goals. Solving these problems is possible only in the context of global partnership and the inclusion of all countries in the elaboration of a strategy to achieve sustainable development goals.
It is obvious that sooner or later regulators of all countries will come to ESG regulation. To un-derstand this process, it is essential to note that up to a certain point, theorists and practitioners separately developed and considered the areas of factors regulation related to environmental protection, social issues and corporate governance. And to certain extent, the issues of corporate governance were the most developed and rooted in the relationship between corporations and investors due to the development peculiarities of financial markets and investment practices.
There are enough factors motivating credit institutions to switch to responsible business based on ESG principles. They are based on the fact that pursuing these principles reduces the risks, especially in the long term. Implementing sustainable development activities does not always give an immediate positive effect. Moreover, if a bank is heavily involved in such activities, corporate efficiency may decrease in the short term, but it will increase in the long term.
An analysis of the contributions on the influence of ESG factors on the banks' financial performance has shown that a lot of scientists agree on the presence of such an influence. However, it is difficult to judge about its significance and level. The data are still insufficient, and the available works are only the beginning of a research path in this area, although some results have already been yielded.
The findings presented in the paper do not fully confirm the thesis that following the ESG principles will lead to an increase in the profitability and efficiency of the banking sector. Only social factors directly affect the performance of the banking sector, while the influence of environmental factors turned out to be insignificant, and governance factors do not have effect on the studied dependent variables, judging by the constructed models.
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Information about the authors
Larisa I. Yuzvovich, Dr. Sc. (Econ.), Prof., Head of Finance, Money Circulation and Credit Dept. Ural State University of Economics, Ekaterinburg, Russia. E-mail: yuzvo-vich@bk.ru
Maksim S. Maramygin, Dr. Sc. (Econ.), Prof., Prof. of Finance, Money Circulation and Credit Dept. Ural State University of Economics, Ekaterinburg, Russia. E-mail: maram_m_s@mail.ru
Mayya I. Lvova, Cand. Sc. (Econ.), Associate Prof., Associate Prof. of Public and Municipal Governance Dept. Ural State University of Economics, Ekaterinburg, Russia. E-mail: minlvova@mail.ru
© Yuzvovich L. I., Maramygin M. S., Lvova M. I., 2023
