Does It Pay Off to Integrate ESG Performance into Bank Investment Portfolio Selection? Empirical Evidence in the European Energy Sector

There is a growing awareness of the need to integrate non-financial information arising from environmental, social, and governance (ESG) factors into corporate strategies, processes, and credit risk assessment to generate long-term value. Our paper aims to develop, through a Data Envelopment Analysis (DEA)-based approach, a credit risk assessment tool that could be used by banks in constructing an efficient and sustainable investment portfolio, able to maximize banks’ probability contemporaneously minimizing corporate inefficiency. This study was carried out on a sample of publicly traded energy companies in Europe, with the energy sector being highly environmentally sensitive. Our portfolio selection model proves to be a valuable tool for building an efficient and sustainable investment portfolio because it leads, within a budget constraint, to selecting both the most efficient companies in absolute terms and those for which ESG scores significantly improve corporate financial efficiency. Additionally, our results show that ESG ratings at high or low levels do not affect overall company efficiency, but at a middle level, they increase it. Findings contribute (and provide suggestions) to policymakers, credit risk managers, and academics.