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Is ESG disclosure associated ESG disclosure

and bank
with bank performance? Evidence performance

from the Visegrad Four countries

Gabriella Lamanda
Faculty of Economics, E€otv€os Lorand University, Budapest, Hungary, and
Zsuzsanna Tamasne V}oneki Received 23 February 2023
Revised 8 June 2023
Institute of Finance, Corvinus University of Budapest, Budapest, Hungary 11 August 2023
Accepted 20 August 2023

Abstract
Purpose – The purpose of this paper is to investigate the relationship between ESG disclosure and banks
performance and to discuss how banks are committed to the implementation of sustainability issues.
Design/methodology/approach – The authors examined the annual, risk and sustainability reports
published by 26 banks located in four Central European countries (Czech Republic, Hungary, Poland and
Slovakia) in the period of 2017–2021. The authors applied the methodology of content analysis and developed
indexes. Panel regression was performed to improve and ensure the robustness of this study.
Findings – The results show that social and governance aspects dominate the ESG preparedness; however,
after 2019, there was a significant improvement in the integration of environmental issues. This study confirms
a strong association between bank size (total assets) and ESG reporting, and between capital adequacy and
ESG reporting. The results demonstrate that there is no connection between banks’ operational and financial
performance and ESG disclosure. Finally, this study concludes that the integration of ESG risks into the risk
management framework is at an early stage.
Practical implications – This study also adds to the existing research in the field of sustainability reporting. For
regulators, this research proves their essential role in the facilitation of sustainable development. For practitioners,
the ESG disclosure index could serve as a “detection tool” in the sustainability self-assessment process.
Originality/value – The authors examined – through a self-developed multidimensional ESG disclosure
index – the sustainability reporting of the banking sector in four countries from the Central European region.
Keywords Sustainability reporting, Sustainability disclosure, ESG, Risk management, Banking sector,
Content analysis
Paper type Research paper

1. Introduction
Environmental, social and governance (ESG) aspects for financial intermediaries – especially for
banks – have become increasingly important in the last few years. A growing interest and an
intensive demand for ESG information have a great influence on banks’ operation. Through the
different forms of investments and financing services provided by banks, market players can be
motivated and put under pressure to move towards sustainability. It means that banks need to
understand the risks arising from ESG factors, “that may have a positive or negative impact on
the financial performance or solvency of an entity” (EBA, 2021, p. 31).
However, there are several voluntary disclosure standards related to ESG (e.g. Global
Reporting Initiative, GRI; Task Force on Climate-related Financial Disclosure, TCFD etc.);
mandatory reporting is essential to ensure comparable and verifiable information.
In the EU – among others – the Non-Financial Reporting Directive (NFRD) (2014), the
Guidelines on non-financial reporting extended in 2019, the Article 8 of the Taxonomy
Regulation (2020), and the Corporate Sustainability Reporting Directive (CSRD) were the
most important attempts that requires large companies to provide information on their ESG
Management of Environmental
Quality: An International Journal
JEL Classification — G18, G38, M14 © Emerald Publishing Limited
1477-7835
The authors are very grateful to unknown referees for their suggestions and constructive comments. DOI 10.1108/MEQ-02-2023-0064
MEQ characteristics and activities. In 2019, the European Commission published the European
green deal strategy. As a part of this strategy the European financial sector came into focus in
delivering of sustainable objectives.
According to the first financial intermediary-focused regulation (Sustainable Finance
Disclosures Regulation (SFDR), 2019), banks should publish how they integrate
sustainability aspects into their operation. In addition to this, the European Banking
Authority (EBA) (2021) through CRR Pillar 3 2013 year(Capital Requirement Regulation,
2013, Part 8th) expects banks to disclose information about their prudential framework and
within this how they manage ESG risks.
Transparency facilitates the sound operation of financial institutions and the financial
stability of the banking sector. According to Flannery and Bliss (2019) “effective market
discipline involves two distinct steps: monitoring a bank’s condition and influencing it to
avoid unacceptably large risks.” ESG as a new type of risks is a challenge for each market
player. ESG risk drivers (e.g. noncompliance with ethical standards, discrimination etc.) can
have even a material impact on other type of risks and can result in a significant decrease of
profitability, capital adequacy, liquidity or investors trust. Therefore, banks need to integrate
ESG risk into their risk management framework, and authorities need to define requirements
for banks related to ESG risk management, including the disclosure of sustainability
information. First steps were taken, but there are many details of ESG issues are unknown.
As Galletta et al. (2022) highlight, the greatest risk factors are social- and greenwashing,
market misalignments and uncertain price volatility. Therefore, the transparent and
consistent sustainability reporting is important to mitigate these risks and to strengthen the
community-company relationship.
However, there is a growing volume of literature on the relationship between ESG and
company performance, number of studies focusing on the banking sector are quite limited.
Through our study we try to fill this gap in the literature.
The purpose of this paper is to evaluate the content and the quality of sustainability
disclosures, and at the same time, to determine which characteristics [size (total assets), level
of leverage, profitability (ROA, ROE), board size and capital adequacy] influence ESG
reporting, in the banking sector of four Central European countries.
Our research follows the content analysis approach applied by Zeghal and Aoun (2016).
We analyze the sustainability-related reports of the largest 26 banks in four Central European
countries (in the so called Visegrad Four (V4) countries: the Czech Republic, Hungary, Poland
and Slovakia) in the period of 2017–2021. To the authors’ best knowledge, sustainability
issues in the Central European banking sector are less researched in the international
literature; therefore, our paper is the first attempt to assess the relationship between
sustainability reporting and banks characteristics for this region. There are some examples
Fijałkowska et al. (2018), Bolibok (2021), Komarnicka and Komarnicki (2022), Dmuchowski
et al. (2023) and Volkova (2022); however, the focus and the methodology of these studies is
different from our analysis. This study differs from previous studies in that we develop a
novel ESG disclosure (ESGD) index based on 32 items/questions. We develop the index with a
material risk management focus, because of two reasons. First, risk management is an
important pillar of the banking operation. Second, as La Torre et al. (2021) and Lupu et al.
(2022) highlight, regulatory authorities focus on ESG risk and put pressure on banks to
understand sustainability risk drivers and translate them into their business models.
Following the advocation of Lee and Suh (2022), we examine the association between
sustainability and performance through a multi-dimensional approach. It means that we
analyze both the total ESG disclosure and its individual components (E, S and G), as well.
This paper contains five sections. After this introduction, the paper is organized as
follows. Section 2 focuses on the literature background. This section presents our hypotheses.
Section 3 speaks about the methodology and our sample. Section 4 describes our findings and
results, and Section 5 presents the conclusions, implications and recommendations. The ESG disclosure
paper closes with Appendices. and bank
performance
2. Literature background and hypothesis development
Several theories support to understand the incentives behind sustainability disclosure:
stakeholder theory, legitimacy theory, resource-based theory and agency theory are the most
widely used views in the literature.

2.1 Quality of sustainability disclosure

According to stakeholder theory, companies are responsible for the widest range of
stakeholders, including customers, suppliers, government, employees and public society
(Ferrell et al., 2010). Both Buallay (2020) and Venturelli et al. (2018) found that satisfying the
needs of stakeholders reflects the commitment to corporate social responsibility and, at the
same time, it can result in the increase of firms’ profitability and reputation. ESG reporting
serves to communicate the company’s stakeholder engagement and to represent the
company’s awareness towards transparency and ethical behavior (Birindelli et al., 2015).
Gray et al. (1995) point out that legitimacy theory and stakeholder theory are two
overlapping theories. According to Suchman (1995), legitimacy theory refers that the actions
of an entity are socially appropriate. It means that ESG reporting is an important
communication tool to reflect the company’s fair and sound behavior toward the society. As
Khan (2010) showed banks use reporting to legitimize their existence and actions
contributing to society. Deegan (2014) states that the violation of ethical norms can
negatively affect the reputation and can require to take different remedial actions, like the
implementation of sustainability measures.
According to the resource-based view, reputation as a strategic resource generates higher
financial performance. Dell’Atti et al. (2016) state that reputation and trust are the keys for
survival, and sustainability reporting plays an essential role to maintain and preserve both
reputation and the trust. In addition to this, ESG disclosure supports banks to create
competitive advantage (Gangi et al., 2019).
Agency theory refers to the potential conflicts of interest between shareholders and
managers (Baker, 1992). To decrease this interest misalignment, managers are monitored by
shareholders, which generates even a high level of agency cost. According to Buallay et al.
(2021, p. 4), “sustainability reporting reduces agency costs and decreases the problem of
information asymmetries.” Grove et al. (2011) emphasize that due to the strict regulation of the
financial sector, agency cost can be even more reduced.
All of these theories confirm that companies are interested in ESG reporting in order to
maintain and increase stakeholders’ trust, and their reputation.
Galletta et al. (2022, p. 22.) conducted a bibliometric analysis and concluded that “the
environmental issue remains in the background,” while studies concerning to social activities
and corporate governance are more researched. It could be explained that before 2015 banks
did not have assessment methods and measures to environmental issues, while related to
governance issues many international organizations and country authorities introduced
rules and guidelines (e.g. Sarbanes-Oxley Act in USA, Cadbury Code in UK, Principles
published by World bank, OECD and COSO). The authors emphasize that the findings of
scientific papers should be interpreted cautiously; mainly because of the lack of unified
expectations towards ESG disclosure that results in heterogeneous sustainability reports.
This is consistent with what has been found in Komarnicka and Komarnicki (2022). They
indicate that ESG regulations are inadequate, unclear and inconsistent, due to the high degree
of generality and because the regulation is at a drafting stage.
MEQ Shen et al. (2016) emphasize that there is a dilemma faced by banks if they decide to engage
CSR because of the advantages (e.g. improving employee productivity; better brand image)
and disadvantages (costs of sustainability actions, limited product development).Their main
result is that implementation of CSR as a long-term strategy enhances reputation and
stakeholders’ trust therefore it provides protection against market downturns if a financial
crisis occurs. A similar conclusion was reached by Rahi et al. (2022). They provide evidence,
that sustainability has several long-term beneficial impacts (e.g. improvements in efficiency,
productivity, customer loyalty, corporate reputation, access to capital, cost savings and
innovation capacity). Gangi et al. (2018) for the European banking industry showed that
higher level of engagement towards sustainability provides wide ranges of opportunities for
banks, e.g. attract better employees, acquire higher market shares, have less price-sensitive
customers.
Mure et al. (2021) analyzed 13 Italian sanctioned banks. They emphasize that the
implementation of ESG aspects into banks’ risk management processes and credit policies
support to restore the confidence into the banking system after the financial crisis.
Chiaramonte et al. (2022) analyzed 84 European large banks and they concluded that ESG
awareness has a stabilizing impact on banks during financial distress.
Hummel and Schlick (2016) evaluates 195 companies that are included in the Bloomberg
European 500 index. The authors show that “superior sustainability performers choose high-
quality sustainability disclosure to signal their superior performance to the market” (Hummel
and Schlick, 2016, pp. 458). Arvidsson and Dumay (2022) examined 27 Swedish multinational
companies and they concluded that while ESG reporting quality improved in the examined
period, quantity of ESG reporting and ESG performance increased until 2014 and levelled out
at around 2015. It points out that the introduction of NFRD did not have a significant impact
on sustainability reporting, therefore the authors argued that further initiations are needed to
ensure more timely, relevant, credible, and comparable information on sustainability
activities.
Therefore, considering the growing attention of regulatory authorities on sustainability
issues, together with the aforementioned theories and literature, our first hypothesis is:
H1. The content of ESG disclosure by the V4 largest banks have improved and become
more sophisticated in the examined period.

2.2 Size
Ali et al. (2017) found that company size is an important driver of CSR reporting agenda.
Taliento et al. (2019) examined – among others – the correlation between corporate size and
ESG performance for 91 large companies and they concluded that corporate size is a
significant background factor, because of the greater visibility, publicity and pressure on
larger companies. In addition, larger companies are more likely to afford to invest in ESG-
related projects. Rahman and Alsayegh (2021) examined more than 1,200 Asian public listed
firms and they showed that companies with higher profitability, higher leverage and larger
size disclose more ESG information due to the greater pressure from media, regulators, other
stakeholders and the society. Alareeni and Hamdan (2020) analyzed the US S&P 500-listed
companies, and they concluded that firms with higher level of total assets tend to disclose
much more sustainability information. These results are consistent with the stakeholder and
legitimacy theories. Ho and Taylor (2007) emphasize that reporting costs may generally be
lower for larger companies, due to economic of scale. Based on agency theory, they stated that
larger firms, facing higher agency costs, are more inclined to disclose information to mitigate
agency costs.
Therefore, considering the results of previous studies, our second hypothesis is:
 H2. The content of ESG disclosure by the V4 largest banks are positively correlated with ESG disclosure
bank size (natural logarithm of total assets). and bank
performance
2.3 Leverage
According to agency theory, companies with higher leverage have higher agency costs. To
decrease these agency costs, highly leveraged firms give priority to publish information on
their soundness (Ho and Taylor, 2007). Based on the stakeholder theory, the higher a firm’s
leverage, the more likely it is to disclose information about its sustainability efforts, in order
to keep or increase stakeholders’ confidence and to decrease the potential risk of financial
difficulties arising to the higher level of indebtedness. As Mure et al. (2021) and Chiaramonte
et al. (2022) point out, in critical situations (even a substantial regulatory fine, or a financial
crisis, or financial problems) sustainability reporting can facilitate to restore the reputation
that is consistent with the resource-based view. Although Dyduch and Krasodomska (2017)
argues for non-financial companies that are listed in the Warsaw Stock Exchange that there is
no proven connection between leverage and ESG reporting, Hummel and Schlick (2016),
Gangi et al. (2018), Alareeni and Hamdan (2020) and Rahman and Alsayegh (2021) found
positive relationship between them.
Based on the above literature background we define our third hypothesis below:
H3. The content of ESG disclosure by the V4 largest banks are correlated with the level of
equity-to-assets ratio (leverage).

2.4 Profitability
According to Short (1979) and Bourke (1989), the most commonly used indicators for the
assessment of profitability in the banking sector are the ROE (Return on Equity) and ROA
(Return on Assets).
Friede et al. (2015) analyzed more than 2000 studies and they found that large majority of
these studies demonstrated positive relationship between ESG factors and corporate
financial performance. Alareeni and Hamdan (2020) concluded that the higher level of ESG
reporting, the higher the companies’ ROA and ROE.
According to Belasri et al. (2020) findings, CSR activities affect positively bank efficiency
only in developed countries. Christensen et al. (2021) pointed out in their literature review that
several studies confirm the positive and significant relationship between ESG activities and
financial performance. Yuen et al. (2022) observed that there is a U-shaped relationship
between ESG and profitability, reflecting that ESG activities improve bank performance in
the long term. Ersoy et al. (2022) examined 176 US commercial banks and they show an
inverted U-shaped relationship between market value and ESG. Menicucci and Paolucci
(2023) examine 105 Italian banks, and they show that ESG policies negatively affect ROA,
ROE, stock market return and Tobin’s Q, showing that Italian banks have not fully applied
robust sustainability procedures. Gholami et al. (2022) found that higher ESG performance
disclosure can generate higher profitability (ROA) for financial companies in Australia.
Buallay (2019) examined 235 banks in the EU, and they found that there is a significant
positive relationship between ESG reporting and ROA and ROE. However, the relationship is
varied if ESG aspects are measured individually. The environmental reporting positively
affects ROE. Social responsibility disclosure has a negative relationship with both ROA and
ROE, while corporate governance reporting affects ROA and ROE negatively. Shakil et al.
(2019) analyzed 93 emerging market banks from 19 countries (including the Czech Republic,
Hungary and Poland) and concluded that environmental and social performance are
positively associated with ROE, but governance performance doesn’t affect it. It may happen
due to the weak regulatory expectations on corporate governance. Menassa and Dagher
MEQ (2020) and Rahman and Alsayegh (2021) found positive association between financial
performance and ESG disclosure. While Dyduch and Krasodomska (2017), for Polish
companies, did not show a significant relationship between financial performance and
sustainability reporting. Similar to this, Fijałkowska et al. (2018) analyzed the 20 biggest
public banks in CEEC (Central and Eastern European Countries, including the Visegrad Four
countries), and they confirmed that corporate social responsibility does not have an impact on
banks’ financial performance (ROA, ROE).
The implications for the relationship between disclosure and profitability are mixed. It is
generally argued that the weaker the profitability is, the higher the motivation to disclose
sustainability information to reduce uncertainty. On the other hand, companies with high
profitability are also motivated to disclose information for the purpose of reflecting their high
level ESG commitment. Given the conflicting results from prior theoretical and empirical
studies, including the aforementioned theories (mentioned in Section 2.1) we define our fourth
and fifth hypotheses as follows:
H4. The content of ESG disclosure by the V4 largest banks are correlated with return on
equity ratio (ROE).
H5. The content of ESG disclosure by the V4 largest banks are correlated with return on
assets ratio (ROA).

2.5 Board size

As Birindelli et al. (2018) pointed out, the optimal board size depends on a firm’s complexity
and the industry, and because banks are large and complex institutions larger boards are
more efficient. Larger boards have better workload allocation and ensure a higher level of
diversification in terms of education, expertise, gender and stakeholder representation.
According to the agency theory, larger boards enhances the monitoring effectiveness and the
maximalization of shareholder value. However, large boards could be ineffective, because, for
instance, scheduling meetings and reaching consensus during board meetings are more
difficult (Samaha et al., 2015). As Rouf and Hossan (2021) present, stakeholder theory points
to the assumption, that a larger and more competent board may better support the interests of
stakeholders; however, they did not find significant relationship between board size and CSR
disclosure for the banking sector in Bangladesh. Dicuonzo et al. (2022) found that size and
composition of the board contribute positively to overall sustainable performance for
European banks. Alodat et al. (2022) confirmed that not only the board size, but the board
gender diversity (Alodat et al., 2023a) and the effectiveness of the board (Alodat et al., 2023b);
moreover, the effectiveness of the audit committee (Alodat et al., 2023c) has significant and
positive effects on firms’ performance, and this correlation can be enhanced by sustainability
disclosure, therefore, sustainability reporting plays an important mediating role. Miranda
et al. (2023) analyzed 75 European banks, and they found that ESG performance negatively
associated with board size.
Based on the above literature background we define the below hypothesis:
H6. The content of ESG disclosure by the V4 largest banks are positively correlated with
board size.

2.6 Capital adequacy

According to Szegedi et al. (2020) and Batae et al. (2021), there is a positive connection between
capital adequacy and other characteristics of banks, namely: size, ROA and ROE. It means
that well capitalized banks are more profitable than banks with lower level of capital
adequacy ratio. Scholtens (2009) assessed more than 30 internationally active banks and
concluded a significant and positive relation between the banks’ CSR performance and their ESG disclosure
capital adequacy. Lippai-Makra et al. (2021) showed that ESG score is a significant and bank
contributor to capital adequacy. According to their results the higher the ESG score, the
higher the capital adequacy ratio. Based on the literature and the financial intermediation role
performance
of banks, we may think that higher level of capital adequacy (soundness) results in higher
level of sustainability commitment. Therefore, we propose the following hypothesis:
H7. The content of ESG disclosure by the V4 largest banks are positively correlated with
capital adequacy (Total Capital Ratio, TCR)

3. Data and methodology

Based on the content analysis research method (e.g. Mayring, 2000; Zhang and Wildemuth,
2005; Hamrouni et al., 2017; Kuckartz, 2019) we examined the English versions of CSR reports,
annual reports and Pillar 3 reports of the 26 largest banks in the so-called Visegrad Four
countries (V4), disclosed in the period of 2017–2021. The group of V4 countries includes the
Czech Republic, Hungary, Poland, and Slovakia. Content analysis is widely used for literature
reviews and for forming measurable indexes from a text. Content analysis is a subjective, and
at the same time scientific research methodology that ensures systematic classification of our
research questions and supports our study methodologically and empirically. Gaur and
Kumar (2018) demonstrated the importance of content analysis through gathering high
ranking content analysis-based articles between 1991 and 2015.
We conducted the content analysis in 2022, so we examined reports up to 2021. For these
five years, approximately 390 reports were involved in the analysis. These 26 banks have the
highest total assets in their respective local sector. The institutions involved and their market
dominance are presented in Annex 1.
In our analysis, we followed the content analysis methodology applied by Zeghal and
Aoun (2016), which inspired us to conduct a similar study with a sustainability focus. The
starting point was the establishment of code sheet. As we concentrated on ESG aspects, we
determined 32 questions based on European regulation and guidelines, and on our own
empirical and practical experience. Our questions can be divided into four groups (see Annex
2). We examined whether the reports included information on these categories:
(1) Framework: includes ESG aspects in strategic context, including ESG risk
management initiations
(2) Environmental aspects: focus on climate change and environment protection
(3) Social aspects: reflect the bank’s social responsibility
(4) Corporate governance aspects: cover the main factors of ethical behavior
Based on the above aspects we coded the potential answers that can be given to the questions.
If a question was answered in the reports, the attributed code took 1 and 0 if otherwise for a
given year. Following the summary of the code values, we calculated the ESG Disclosure
Index (ESGD) using the following formula:
Pn
Si
i¼1
ESGD ¼ (1)
n
where Si is the code attributed to each item, which can be 1 if the item is disclosed or 0 if
otherwise; n is the number of questions in the ESGD index, that is 32.
MEQ Based on formula (1), we analyzed the ESGD index in a historical and peer group (by
countries) perspective.
As discussed in the literature background, banks can have manifold incentives to disclose
sustainability information: lower cost of capital, increased access to capital and money
markets etc. Therefore, it is expected that the content and the quality of sustainability
information widened and improved in the period examined.
To improve and ensure the robustness of our study, we test our hypotheses by panel
regression.
Table 1 shows the variables selected for analysis.
After evaluation of the banking disclosures and forming the four indexes, we have run the
following panel regression models:
.
ESGDi;t ¼ αi þ β1 lnTotalasseti;t þ β2 E Ai;t þ β3 ROAi;t þ β4 ROEi;t þ β5 Board sizei;t

þ β6 Capitali;t þ εi;t
(2)

and for the Framework called Framework Disclosure (FD)


FDi;t ¼ αi þ β1 lnTotalasseti;t þ β2 E Ai;t þ β3 ROAi;t þ β4 ROEi;t þ β5 Board sizei;t
þ β6 Capitali;t þ εi;t (3)

and for the Environmental issues called Environmental Disclosure (ED)


EDi;t ¼ αi þ β1 lnTotalasseti;t þ β2 E Ai;t þ β3 ROAi;t þ β4 ROEi;t þ β5 Board sizei;t
þ β6 Capitali;t þ εi;t (4)

and for the Social issues named Social Disclosure (SD)

Independent variables Measure Code Source

Bank size Natural logarithm of total assets lnTotalasset Annual report

Leverage Total liability(debt)/Total assets E/A
Profitability-financial Return to asset ratio ROA
performance
Profitability-operational Return on equity ROE
performance
Board size Number of the board members Boardsize
Capital adequacy Total capital ratio (Total capital/ Capital
Risk Weighted Assets)
ESG disclosure index ESG disclosure index ESGD CSR reports, annual
Framework disclosure Framework disclosure index FD reports and Pillar 3 reports
index
Environmental disclosure Environmental disclosure index ED
index
Table 1. Social disclosure index Social disclosure index SD
Variables and their Governance disclosure Governance disclosure index GD
sources of the index
regression analysis Source(s): Our own work
 
SDi;t ¼ αi þ β1 lnTotalasseti;t þ β2 E Ai;t þ β3 ROAi;t þ β4 ROEi;t þ β5 Board sizei;t ESG disclosure
and bank
þ β6 Capitali;t þ εi;t (5) performance
and for the Governance issues named Governance Disclosure (GD)

GDi;t ¼ αi þ β1 lnTotalasseti;t þ β2 E Ai;t þ β3 ROAi;t þ β4 ROEi;t þ β5 Board sizei;t
þ β6 Capitali;t þ εi;t (6)

where i is the bank and t is the year.

The Breusch-Pagan test did not sign any heteroskedasticity problem. Based on the
Hausman test, at the ESGD (2), Framework (3) and Environment (4) the fixed effect model is
the best method for analyzing connections. In case of Social (5) and Governance (6) aspects,
we used random effect model.

4. Findings of the analysis

In this section, we examine how reports provide relevant information on sustainability
activities, at the same time we test our hypotheses through the ESGD index, and regression
analysis.

4.1 Analysis of ESG content in reporting – descriptive statistics

Table 2 presents the descriptive statistics for the variables used in the regression analysis.
Indices – in country and historical perspective – are represented in the below figures.
Figure 1 shows the ESG Disclosure Index by countries. As can be seen in the figure, the ESG
content of reporting became wider and improved to a great extent in V4 countries. However,
Korzeb and Samaniego-Medina (2019) found that sustainability was not a priority for the
Polish commercial banking sector. Based on our results, we can state that Poland was
significantly ahead of other three countries and for 2021 the ESGD index reached 86%.
If we evaluate ESG aspects separately by components (Framework, Environmental, Social
and Governance issues), Figure 2 indicates that before 2019 the reports focused mainly on
social issues and corporate governance topics. The dominance of these aspects could be
explained with the growing requirements for companies – including large banks – listed on
the stock exchange to disclose their corporate social responsibility reports annually. From
2020, with the tightening and widening of regulatory requirements, the environmental aspect
precedes the issues of governance. During these years, sustainability became from a
reputational tool to an essential part of business.

Variables Code Mean SD Min Max

Bank size lnTotalasset 9.931 0.807 8.108 11.420

Leverage E/A 9.70% 2.07% 2.46% 15.29%
Profitability ROA 1.01% 0.64% 1.29% 2.57%
Profitability ROE 9.92% 5.99% 16.17% 25.64%
Board size Boardsize 7.49 1.85 3 14
Capital adequacy Capital 18.87% 2.46% 13.75% 25.63% Table 2.
Note(s): This table presents descriptive statistics for the variables used in the regression analysis. Statistics Descriptive statistics
are presented for the full sample of 26 banks for regression
Source(s): our own work based on banks’ annual reports variables
MEQ 1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1

Figure 1. 0
Average ESGD index 2017 2018 2019 2020 2021
by countries between
Czech Republic Hungary Poland Slovakia
2017 and 2021
Source(s): Our own work

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1

Figure 2. 0
Average value of 2017 2018 2019 2020 2021
ESGD elements
between 2017 and 2021 Framework Environment Social Governance
Source(s): Our own work

After 2019, a breaking point can also be seen in the design of the framework. Banks started to
establish separate ESG strategy, organization, and committee.
Based on descriptive statistics, we identified those issues that are the less developed
and those that are the most advanced. As the table in Annex 2 shows, the most critical
areas are related to the implementation of ESG framework. Integration of ESG into banks’
risk management framework is at an early stage. Banks do not quantify their ESG
exposure and, however, some management statements are published regarding to ESG
commitment, they do not articulate ESG risk appetite. ESG considerations are not usually
considered during business continuity planning. While banks often adopt special
sustainability policies regarding sensitive sectors (e.g. mining), it is not a widespread
practice to integrate ESG risks into their pricing models. Based on a comprehensive
assessment with the involvement of 150 stakeholders – including banks, supervisors,
international organizations and academics – EC (2021) confirms that integration of ESG
risk management processes is very limited.
 Majority of banks are excellent in the public activities regarding climate protection, ESG disclosure
workplace wellbeing and supporting local communities. Fair banking and corporate ethics and bank
are also highlighted in sustainability reports because of the stricter regulatory expectations
regarding these issues after the 2008 global financial crises.
performance

4.2 Analysis of the association of ESG reporting and bank performance – regression
analysis
Table 3 contains the results of regression analysis based on equations that are presented in
Data and methodology section.
The results of the regression analysis show (Table 3) that the size of the bank positively
and significantly influences the ESGD index and all its components. Similar to the findings of
Ali et al. (2017), Taliento et al. (2019), Rahman and Alsayegh (2021) and Alareeni and Hamdan
(2020), our study provides evidence that the larger a bank is, the more it invests in the
implementation of sustainability issues into its operation. Focusing on the leverage, we found
that there is no evidence for any relationship between leverage and ESG reporting. This
finding is in line with the results obtained by Dyduch and Krasodomska (2017). If we analyze
the connection with individual components, we see that leverage negatively correlated with
the FD index and positively associated with the SD index. Based on our results, it can be seen
that profitability (ROA and ROE) didn’t improve significantly. This finding is consistent with
the result obtained by Dyduch and Krasodomska (2017) and Fijałkowska et al. (2018). One
explanation for our finding is that the period between 2017 and 2021 was entirely turbulent
(rapidly changing regulatory requirements, COVID-19 pandemic and the government actions
to prevent economic downturn, increasing level of geopolitical risks etc.); and several factors
and incidents affected the profitability of the banking sector. Contrary to the findings of
Buallay (2019), Shakil et al. (2019), Alareeni and Hamdan (2020), Gholami et al. (2022),
Menassa and Dagher (2020), Rahman and Alsayegh (2021) that found positive relationship
between profitability and ESG reporting, and Menicucci and Paolucci (2023) that showed
negative relationship between them, the results of regression analysis do not indicate any

Model_1 Model_2 Model_3 Model_4 Model_5

Model Governance
ESGD (Fixed effect Framework (Fixed Environment Social (Random
variations (Random effect
model) effect model) (Fixed effect model) effect model)
model)
Total asset (ln) 0.383*** 0.379** 0.686*** 0.164*** 0.172***
E/A –0.019 –0.047** 0.017 0.031** 0.010
ROA 0.005 –0.0599 0.045 –0.0498 0.073
ROE –0.004 0.001 –0.012 0.007 –0.009
Capital 0.016** 0.017* 0.013 0.002 0.014**
Board size –0.021* –0.021 –0.018 –0.034** –0.012
_cons –3.222** –3.092** 1.604*** –0.880* –1.33***
R-sq:
within 0.5386 0.5892 0.4447 0.0702 0.1542
between 0.2395 0.1033 0.2515 0.4372 0.4431
overall 0.2561 0.1834 0.2095 0.2376 0.3351

Note(s): *p < 0.1; **p < 0.05; ***p < 0.001

In these five models the independent variables are the same, they differ in dependent variables. In Model 1 the
dependent variable is ESGD index, in Model 2 the framework index, in Model 3 the environment index, in Model
4 the social index and in Model 5 the governance index. We highlighted the significant variables based on their Table 3.
p value Results of regression
Source(s): Our own work based on the results of regression analysis analysis
MEQ connection between ESG disclosure and performance (ROA, ROE) for V4 banking sector.
The absence of a positive relationship suggests that in V4 countries it is the regulator’s
responsibility to force the banking sector to consider ESG aspects, because banks cannot see
any additional profit from this approach. Concerning the sixth hypothesis, however,
Dicuonzo et al. (2022) found a positive relationship between board size and sustainability
reporting for European large banks, our result shows that board size has a significant and
negative effect on the ESGD index. It was also confirmed by Miranda et al. (2023). Focusing on
the individual components, between board size and SD index there is also a significant and
negative connection. The negative relationship is a surprising result and difficult to justify.
One potential explanation can be that larger board size may hinder strategic initiatives and
actions and may contribute to a lack of unity in the decision-making process. The correlation
between the size of the bank and the number of Board members is only 36.75%, meaning that
larger banks do not necessarily work with larger Boards. The positive relationship between
the ESGD index and bank size cannot therefore be projected onto the size of the Board.
Finally, we found that there is a significant and positive relationship between the capital
adequacy ratio and the ESGD index. Similar results were obtained by Scholtens (2009) and
Lippai-Makra et al. (2021). If we look at the individual components of ESGD, the similar –
positive and significant – association can be seen with the SD index.
As Table 4 shows, based on the results of descriptive statistics and regression analysis, we
accept the H1, H2 and H7 hypotheses and reject H4 and H5 hypotheses. The connection
between the leverage and ESG reporting – including the individual components – is unclear;
therefore, we reject H3 hypothesis, as well. The results confirmed that the board size
negatively influences the disclosure’s content and quality, especially the social part of it;
therefore, we reject our H6 hypothesis and prove the opposite of H6.

H1 H2 H3 H4 H5 H6 H7
Positive
Positive Positive relationship
relationship Relationship Relationship Relationship relationship (capital
Improvement (total assets) (leverage) (ROA) (ROE) (board size) adequacy)

ESGD Proved Significantly No No No Significantly Significantly

positive negative positive
FD Proved Significantly Significantly No No No No
positive negative
ED Proved Significantly No No No No No
positive
SD Proved Significantly Significantly No No Significantly Significantly
positive positive negative positive
GD Proved Significantly No No No No No
positive
Table 4. Decision Accepted Accepted Rejected Rejected Rejected Rejected Accepted
Decision on hypotheses Source(s): Our own work

5. Conclusions and recommendations

From the findings above, key conclusions emerge: (1) between 2017 and 2021 the quality and the
content of ESG disclosures improved in the V4 banking sector; (2) there is a significant and
positive correlation between ESG reporting and the size of banks; (3) there is a significant and
positive correlation between ESG reporting and the capital adequacy (4) related to other
variables (e.g. leverage, ROE, ROA and board size); results are diverse and non-convincing;
(5) the implementation of an enterprise-wide ESG risk management framework is at an
early stage.
 Several studies – including ours, and for instance Shen et al. (2016) and Christensen et al. ESG disclosure
(2021) – have not provided convincing conclusion on the relationship between sustainability and bank
reporting and the companies’ performance. Main reason of this diversity could be the
diversity of regulation and the different interpretation of these expectations. Therefore, it is
performance
essential to unify regulatory expectations; data and information in reports must be
meaningful, comprehensive, comparable, consistent by time and by countries. In addition to
this, due to the absence of any connection between ESG disclosure and the banks profitability
(ROA, ROE), regulatory requirements are essential driving force in sustainable development.
As Shakil et al. (2019), Arvidsson and Dumay (2022) and Komarnicka and Komarnicki (2022)
also emphasize, further and more advanced regulatory efforts are needed.
The present findings confirm the strong association between the size (total assets) and
ESG reporting. This is consistent with what has been found in Ali et al. (2017), Taliento et al.
(2019), Alareeni and Hamdan (2020) and Rahman and Alsayegh (2021). Larger banks provide
more information on sustainability, because they are more likely to afford to invest in ESG-
related projects and due to the greater public pressure on them.
Similar to the findings of Scholtens (2009) and Lippai-Makra et al. (2021), our analysis found
evidence for the significant relationship between capital adequacy and ESG reporting, however,
the association between capital adequacy and the individual components of ESGD is diverse.
If we look at the individual questions (Annex 2) and answers, our results provide evidence
that ESG risk management is at an early stage, as obtained in EC (2021). The result highlights
that little is known about ESG risk and how it could be taken into consideration and
integrated into the existing business model, including processes, services, systems and
control activities. This is an important result of our study to reveal the opportunities for the
improvement of ESG risk management frameworks. For instance, ESGD index as a
“detection tool” could be the starting point of a self-assessment process for the identification
of critical points, gaps, and opportunities for the improvement. As La Torre et al. (2021) and
Mure et al. (2021) highlight, the establishment of ESG risk management framework supports
the soundness of institutions and facilitates financial stability.

6. Limitations and future research

An apparent limitation of our content analysis is that the examined period changed
dynamically – the COVID-19 pandemic, Britain’s decision to withdraw from the European
Union, to mention only a few of those factors that increased the uncertainty and the risk.
These events and risk factors put pressure on the banking sector to rethink and renew their
operation. Filtering out this dynamically changing period and the impacts of the crisis with
adequate control variables and examining the relationship between ESG reporting and banks
performance without these effects could be a further improvement.
Our study provides several options for future research. First, how the coronavirus, as a
substantial form of ESG risk, affects the sustainability disclosures and the reporting behavior of
banks. Second, future research might investigate other financial intermediaries, such as insurance
companies that are also required to disclose sustainability information. Finally, it is recommended to
extend the geographical scope of analysis to other Central European or Eastern European countries.

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parliament and of the council brussels”, 21.4, available at: https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri5CELEX:52021PC0189&from5EN
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deal-communication_en.pdf

Annex 1.

Hungary Poland Slovakia Czech republic

Selected banks OTP Bank PKO Bank Polski Slovenska 

Ceskoslovensk a
Sporitelna obchodnı banka
CIB Bank Bank Pekao SA VUB banka Ceska sporitelna
Unicredit Santander Bank Tatra banka Komercnı banka
Bank Polska a.s
K&H Bank mBank SA 
CSOB a.s UniCredit Bank Czech
Republic
Erste Bank ING Bank Slaski Raiffeisenbank a.s
Budapest Bank BGZ_ BNP
Bank* Paribas SA
Raiffeisen Bank Millennium
Bank
FHB* Alior Bank SA
MKB
Total market share of 90.2% 87.3% 83.7% 81.0%
Table A1.
Selected banks and selected banks, by total
their cumulated market assets (2021)
share (based on total Note(s): * These banks does not exist in 2021, because they were merged by acquisition into the MKB. The
assets disclosed in table contains the data from 2020
banks’ annual reports) Source(s): Our own work based on Total Assets disclosed in banks’ Annual Reports
Annex 2. ESG disclosure
and bank
performance
Number of "0"
Question Category Worst 5 in red
Best 5 in green
emissions? 51
energy consumption? 47
measures taken to protect the environment? 13
longer-term vision for the environment? 29
Do the reports contain information on Environment
the importance of climate protection? 26
green banking products? 66

sensitive sectors (with high, non-preferred level of ESG risk)? 79

sustainability criteria for workers? 6
grants, donations? 11
Do the reports contain information on Social
actions in relation to financial education? 28
how to try increase customer confidence (e.g. data security)? 23
measures to prevent money laundering and financing of
15
terrorism?
fair competition? 68
Do the reports contain information on
corporate ethics? Governance 9
96
fines (in terms of consumer protection and competition rules)?
Is there a mix of women and men on the board? 45
senior management’s commitment in relation to all three
13
aspects?
ESG rating (provided by rating agencies)? 102
ESG expectation for suppliers? 54
ESG risk and its interpretation? 69
whether ESG risk is defined as a separate risk category? 87
whether ESG aspects are integrated into the existing risk
82
management framework?
whether ESG aspects and risks are addressed by a dedicated
Do the reports contain information on 100
organization?
whether ESG issues are discussed by any committee? Framework 104
how the bank quantifies ESG risk exposure? 124
ESG risk appetite? 118
whether the bank address ESG aspects through BCP,
123
scenarios, and stress tests?
whether the bank take into account ESG considerations during
106
its pricing processes?
whether ESG aspects are included in remuneration policy? 112
Are ESG aspects mentioned in a strategic context? 30
Does the bank also mention ESG aspects in its annual report? 37
Are clear, representative reports available on this topic? 66

Note(s): The score is “1”, if the answer for the question was contained by the reports and “0” if otherwise Table A2.
Source(s): Our own work List of questions

Corresponding author
Gabriella Lamanda can be contacted at: lamanda.gabriella@gtk.elte.hu

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