Sustainable banks augment the safety of the financial system

Banks with a high sustainability score have a lower default risk. In addition, the most sustainable banks help to reduce the systemic risk of the financial system as a whole. These are the conclusions of Bert Scholtens, Professor of Sustainable Banking and Finance at the University of Groningen, drawn from research he carried out with Master’s student Sophie van ’t Klooster. ‘Sustainability is hugely important to both banks and the regulators. Improving sustainability can reduce bank risk and augment the safety of the financial system’, claims Scholtens.

Van ’t Klooster and Scholtens studied a number of European banks, looking for links between sustainability and risk. They focused on two specific bank risks: the default risk (the risk that each individual bank runs) and the systemic risk (the contribution of these banks to the risk of the financial system as a whole). Scholtens and Van ’t Klooster’s findings were recently published in Nature’s open access scientific journal Palgrave Communications.

Pivotal role

Although the sustainability performance of banks is usually small in comparison with that of industrial companies, it is highly relevant to study this as banks play a pivotal role in society, as shown in other studies of Scholtens . Banks operate worldwide and enable all kinds of projects. This interaction between banks and the companies they fund enables banks to exercise influence on changes in environmental systems and relationships within society. The researchers studied the banks’ policies with regard to the environment, society, internal control and management of their customers.

Higher profitability

Previous academic research had already revealed a positive link between the financial performance of a bank and its sustainability score. Banks with a high score tend to make slightly higher profits. It would now appear that sustainable banks also augment their own safety as well as that of the financial system.

More information

• Contact: Bert Scholtens
• See also the full publication Sustainability and bank risk in Palgrave Communications (Open Access)
• Sophie van ’t Klooster conducted this research as part of her Master’s programme in Economics and Finance. She now works as a Knowledge Manager of Financial Restructuring & Recovery for the Rabobank Groep.

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