Abstract
Risk management and long-term value creation of banks are increasingly linked to Environmental, Social, and Governance (ESG) factors. This paper investigates the relationship between ESG performance and bank stock returns in the U.S. from 2013 to 2022. Using panel data regressions on individual stock returns, the analysis shows that banks with higher ESG scores outperform their lower-rated counterparts during periods of market turbulence and subsequent recovery. However, this performance advantage diminishes once market conditions stabilize. The effect is particularly pronounced during the first year of the COVID-19 pandemic and during phases of elevated market sentiment. Complementary portfolio-level analyses confirm these findings, revealing that the social and governance factors play a significant role in driving excess returns. The results suggest that during periods of market distress, investors tend to favor banks with stronger ESG profiles, consistent with valuation-based theories linking sustainability preferences to lower discount rates and higher firm valuations. Overall, the evidence indicates that robust ESG practices enhance banks’ resilience across varying market conditions, offering relevant implications for bank management, investors, and financial regulators.