Research On The Impact Of ESG Rating On The Systemic Risk Of Chinese Commercial Banks

In recent years,global climate and environmental issues have increasingly received high attention from countries around the world.Climate change can lead to glacier melting,sea level rise,frequent natural disasters,and extremely adverse effects on the ecological environment and human health.The United Nations first proposed the concept of sustainable development at the Stockholm Conference in 1972,which is a development model that meets the needs of contemporary people without compromising the needs of future generations to meet their own needs.The concept of sustainable development is one of the most urgent issues in current society and is widely recognized by countries around the world.Following the adoption of the United Nations 2030 Agenda for Sustainable Development in 2015,governments around the world aim to transition to a low-carbon and green sustainable development model.China also proposed the "dual carbon" strategic goals of "carbon peaking" and "carbon neutrality" in 2020.ESG represents a new concept of development that advocates for enterprises to fully consider environmental protection,social responsibility,and corporate governance in the investment and financing decision-making process.It is in line with the concept of sustainable development currently popular in the world,which will help China achieve the dual-carbon strategic goal of "carbon peak,carbon neutrality" and promote the high-quality development of Chinese economy.Commercial banks are important parts of Chinese financial system,and should bear more environmental,social and corporate governance responsibilities when making investment decisions.Banks with poor ESG ratings can cause stakeholder disputes due to reputation damage,becoming the focus of legal and public disputes,facing negative financial consequences,and exacerbating bank risks.Due to the high correlation between markets,the increased risk level of banks will spread to the entire financial system and become a potential factor causing systemic risk.In this context,it is of great significance to study whether ESG rating will have an impact on banks’ systemic risk and the specific mechanism for preventing and controlling systemic financial risks and realizing Chinese sustainable economic development.At the same time,affected by the COVID-19,the global economic development has entered a period of many uncertainties.Frequent adjustments in Chinese economic policies to adapt to the constantly changing market environment can lead to increased uncertainty in economic policies.Commercial banks will be affected by the increasing uncertainty of economic policies.Therefore,it is particularly important to further analyze how economic policy uncertainty affects the relationship between ESG ratings and banking systemic risk.This article systematically reviews the relevant literature on ESG ratings and systemic risk of commercial banks,and analyzes the current status of ESG ratings and systemic risk of 36 listed banks in China.Based on stakeholder theory,legitimacy theory,and reputation theory,a theoretical analysis is conducted on the general mechanism and mechanism of ESG rating’s impact on commercial bank systemic risk,as well as how the increase in economic policy uncertainty affects the relationship between ESG rating and commercial bank systemic risk.On this basis,this article is based on quarterly panel data from 36 listed banks in China from 2009 to 2022.By introducing support vector machine regression(SVR)in machine learning into the measurement of CoVaR indicators,a DCC-SVR-GARCH-CoVaR model is established to measure the systemic risk spillover rate of commercial banks.A static panel model and mediation effect model are constructed to empirically analyze the relationship between ESG rating and systemic risk of Chinese commercial banks,To verify the impact and mechanism of ESG ratings on the systemic risk of Chinese commercial banks.In the context of increasing economic policy uncertainty,an economic policy uncertainty index is established to study how the strengthening of economic policy uncertainty affects the relationship between ESG ratings and systemic risk of commercial banks through moderating effect models and moderated intermediary effect models.The following conclusions can be drawn from the study of this article: Firstly,the improvement of ESG rating can significantly reduce the systemic risk level of Chinese commercial banks,and the reduction effect of ESG ratingt improvement on the systemic risk level of banks is mainly driven by corporate governance(G dimension).Further heterogeneity regression tests were conducted on the effects of ESG ratings on commercial bank systemic risk based on bank types,bank characteristic variables,and different environmental regulatory intensities.The results show that the improvement of ESG rating of local banks,banks with high cost-income ratio,small banks and banks with high environmental regulation intensity has more significant effect on the reduction of systemic risk of commercial banks.Secondly,the improvement of ESG rating will reduce the systemic risk level of commercial banks by reducing their risk taking,reducing the degree of information asymmetry between banks and customers,and enhancing their profitability.The "risk" channel allows banks to fully consider sustainable development factors when granting credit,which can reduce the adverse selection and moral hazard issues they face,and thereby reduce the risk level of banks by reducing their non-performing loan ratio.In the process of risk contagion,it can curb the spread of systemic risk and reduce the level of systemic risk of banks;The "information" channel creates a reputation for banks in their relationships with customers,where the ESG rating increases.This reputation includes information about the bank,which reduces the information asymmetry between the bank and customers,enhances customer trust in the bank,contributes to the stability of the bank’s business,reduces the likelihood of the bank facing risks,and thus reduces the level of systemic risk of the bank;The "profit" channel allows banks to invest in projects that meet ESG standards.By increasing the ESG rating,they can easily receive support from government departments,reduce operating costs,improve the bank’s profitability,and thereby enhance the bank’s ability to resist risks,further reducing the bank’s systemic risk level.Thirdly,increasing economic policy uncertainty will strengthen the inhibitory effect of ESG rating increases on systemic risks of banks.Due to the frequent adjustment of economic policies,the public and stakeholders have uncertain expectations about the future of banks,and they will become more cautious when choosing banks for business dealings,which will significantly amplify the reputational effect of ESG rating upgrade on banks,and further strengthen the inhibition effect of ESG rating upgrade on banks’ systemic risksFourth,by establishing an intermediary effect model with economic policy uncertainty regulation,it can be concluded that the first and second half of the intermediary channel of "ESG rating—risk taking of commercial banks—systemic risk of commercial banks" are both regulated by economic policy uncertainty;The intermediary channel of "ESG rating — information asymmetry — systemic risk of commercial banks" is moderated by economic policy uncertainty in the first half of the process,while the moderating effect of economic policy uncertainty in the second half is not significant;The intermediary channel of "ESG rating—profitability—systemic risk of commercial banks" is not moderated by economic policy uncertainty in the first and second half of the process.Based on research findings,in order to fully leverage the positive role of ESG rating in reducing systemic risk in commercial banks,this article proposes the following policy recommendations:Firstly,when formulating the overall strategy,business objectives,and risk regulatory framework for commercial bank supervision,the State Administration for Financial Supervision and Administration should fully consider risks related to environmental,social responsibility,and corporate governance(ESG)factors,and closely monitor risks related to ESG factors.Secondly,the State Administration of Financial Supervision and Administration should,based on advocating for the disclosure of ESG related information by various institutions,improve the ESG evaluation system of commercial banks,guide banks to practice ESG concepts,improve ESG ratings,fully play the crucial role of their own financial hub,and promote sustainable development of the Chinese economy.Once again,comprehensively promote the ESG construction of commercial banks from all aspects and continuously improve their ESG governance capabilities.Finally,based on the business characteristics of state-owned banks,joint-stock banks,and local banks and the different effects of ESG ratings,different types of banks are advocated to implement differentiated ESG construction,so as to ensure that all kinds of banks can carry out ESG construction according to their own characteristics and business scope.The innovations of this paper are as follows: Firstly,there is relatively little research on ESG rating and systemic risk of banks both domestically and internationally.No scholars have yet expanded their research from the impact of ESG rating on banks’ own risk taking to the systemic risk of other financial institutions and even the entire banking system,namely banks.This article systematically examines the impact of ESG rating on bank systemic risk and reveals the reducing effect of ESG rating enhancement on bank systemic risk.Secondly,this article improves the accuracy of traditional CoVaR models in measuring systemic risk by using support vector machine regression(SVR)when calculating the CoVaR indicator to measure the level of systemic risk of commercial banks.Support Vector Machine Regression(SVR)captures the nonlinear characteristics of return volatility by mapping data to a high-dimensional feature space,significantly improving the accuracy of estimating time-varying dynamic means and volatility,and enhancing the accuracy of measuring systemic risk in commercial banks.Thirdly,this article proposes a research framework on the mechanism by which ESG ratings affect the systemic risk of commercial banks,revealing the transmission mechanism of ESG ratings on the systemic risk of commercial banks through three channels: "risk" channel,"information" channel and "profit" channel.Placing ESG rating,commercial bank systemic risk,and economic policy uncertainty within the same research framework reveals the regulatory role and specific regulatory mechanisms of economic policy uncertainty on the impact of ESG rating on the systemic risk of commercial banks,broadens the research perspective,and fills the gap in related research fields.