Disaggregated ESG Dimensions and the Market Valuation of European Banks

Environmental, social, and governance (ESG) considerations have become an increasingly important component of sustainable finance, investment decision-making, and banking regulation. As financial institutions face growing pressure to integrate sustainability objectives into their business models, understanding how sustainability performance relates to market valuation has become an important issue for investors, regulators, and bank management. Despite the growing ESG literature, evidence regarding the valuation relevance of individual ESG dimensions remains limited, particularly in the European banking sector. This study examines whether ESG dimensions are uniformly associated with the market valuation of European banks or whether financial markets differentiate among individual ESG pillars. Using a panel dataset of European banks covering 2021–2024 and Bloomberg ESG indicators, the study estimates panel econometric models to evaluate the associations between disaggregated ESG pillars and market-based valuation measures. The empirical findings reveal substantial heterogeneity across ESG dimensions. The social pillar is positively associated with market valuation, whereas the environmental pillar is negatively associated, while governance exhibits weak or statistically insignificant associations. The findings remain robust across several alternative model specifications. The results indicate that investors in highly regulated European banking markets differentiate between ESG dimensions, suggesting that financial markets differentiate among ESG dimensions and that analysing ESG at the pillar level provides a more nuanced understanding of market valuation than aggregate ESG measures.