In recent years, banks, financial markets, and public authorities showed a growing attention for sustainable finance. The Environmental Social and Governance (ESG) factors have concrete effects on banking activity and as for the banking market, ESG risks are the main current focus of both financial authorities and banks. There is a growing consensus, in literature and among professionals, that ESG risks may impact on the traditional financial risks regulated by the Basel III framework: mainly credit risk, liquidity risk, market risk, operational risks (BIS, 2020). Such risks are supervised thanks to several regulatory requirements by financial authorities. Our research aims at analysing the relationship between banks ESG scores and their degree of compliance with prudential ratios required by Basel III. The research question assumes that, if banks are exposed to high level of ESG risks (low ESG scores), ESG factors could impact seriously on their financial stability, requiring more comfortable prudential ratios. We, therefore, expect banks with higher ESG risk exposure (lower ESG scores) to show more comfortable prudential regulatory ratios. We test our analysis also exploring the relationship between banks ESG scores and their degree of compliance captured by financial penalties.; we expect banks with higher ESG risk exposure (lower ESG scores) to be the most sanctioned. Our analysis takes into consideration a sample of 44 banks belonged to EUROSTOXX 600 and makes use of an econometric model.
