Environmental, Social, Governance (ESG), And Financial Performance of European Banks

Bătae, Oana Marina; Dragomir, Voicu-Dan; Feleagă, Liliana Article Environmental, Social, Governance (ESG), And Financial Performance of European Banks Journal of Accounting and Management Information Systems (JAMIS) Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Bătae, Oana Marina; Dragomir, Voicu-Dan; Feleagă, Liliana (2020) : Environmental, Social, Governance (ESG), And Financial Performance of European Banks, Journal of Accounting and Management Information Systems (JAMIS), ISSN 2559-6004, Bucharest University of Economic Studies, Bucharest, Vol. 19, Iss. 3, pp. 480-501, https://doi.org/10.24818/jamis.2020.03003 This Version is available at: https://hdl.handle.net/10419/310779 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Accounting and Management Information Systems Vol. 19, No. 3, pp. 480-501, 2020 DOI: http://dx.doi.org/10.24818/jamis.2020.03003 Environmental, social, governance (ESG), and financial performance of European banks Oana Marina Bătaea1, Voicu Dan Dragomira and Liliana Feleagăa a Bucharest University of Economic Studies, Romania Abstract Research Question: How do ESG and financial performance indicators vary according to different classifications of European banks? Motivation: Banks’ ESG performance and its relationship with corporate financial performance represents a field of continuous interest for researchers and practitioners. The results of previous studies are still mixed, either positive, negative, or even neutral. What’s new? The novelty of this paper is represented by the statistical comparison of variables that measure the ESG and financial performance of European banks based on three classifications that we propose (i.e. the geographical regions of Europe, functional currency, and cluster analysis on GDP and population of European countries, respectively). To the best of our knowledge, there are no studies applied to the banking sector, analyzing the selected variables between groups of banks according to the aforementioned classifications. So what? We contribute to the field by extending Thomson Reuters’ grouping of banks (Emerging and Developed Europe) with three more classifications. The comparison of ESG and financial performance data contributes to practice by highlighting which parts of Europe contain the banks with the highest and respectively the lowest values of ESG and financial performance, controversies, and audit fees. Therefore, the results will help investors, policymakers, regulatory bodies, bank managers, and auditors to acknowledge the significant differences within Europe and adopt appropriate measures that could improve the financial and sustainability performance of banks. Data: We collect data from Thomson Reuters Eikon, World Bank statistics, and EuroVoc for 108 European banks (81 from Developed Europe and 27 for Emerging Europe) for 2018, the most recent year on which all information is available. Tools: We conduct a cluster analysis on the macroeconomic variables of the study: the GDP per capita and the population. We used group tests and the ANOVA test as methods in analyzing the results. 1 Corresponding author: Oana Marina Batae, The Bucharest University of Economic Studies, Faculty of Accounting and Management Information Systems, Ph.D. Candidate, 6 Piața Romană, 1st District, Bucharest, 010374, Romania, email address: [email protected]. Accounting and Management Information Systems Vol. 19, No. 3 481 Findings and Contribution: We contribute with a quantitative study that fills the gap in the literature regarding significant differences that are obtained in ESG and financial performance of banks classified as Developed Europe versus Emerging Europe; Eurozone versus non-Euro countries; Western, CEE, Northern, and Southern banks; small GDP – large population and large GDP – small population clusters. Our methodology will improve future research in adopting better and more transparent classifications of companies analyzed at an international level. Keywords: Banking sector; ESG performance; Corporate social responsibility; Environmental performance; Corporate governance; Emerging Europe; Developed Europe JEL codes: F64; G21; G34; M14; O16 1. Introduction Banks play an important role in the financial stability of the global economy. As Scholtens and van’t Klooster (2019) mentioned, banks are crucial for economic development, bearing a great responsibility across communities. Past banking scandals intensified the need for good corporate governance. Banks should focus on environmental protection, social involvement, and corporate governance (ESG) on a strategic level. For example, financing environmental projects should be included in the banks’ risk strategy. Executives need to pay more attention to local communities, product quality, and workforce improvement as part of corporate social responsibility. Above all, implementing better governance structures will decrease business risk and create shareholder wealth. Establishing corporate values represents an important process through which business leaders can communicate their vision to all employees and set the direction and strategy (Ehrenhard & Fiorito, 2018). Banks that are considered too big to fail, also called “systemic” banks, have had their reputation affected by different scandals even if they had a functioning social responsibility system (Venturelli et al., 2018). However, the scandals and controversies linked to the role of banks in the financial crisis of 2008 have revealed failures in different corporate social dimensions and governance mechanisms (Esteban-Sanchez et al., 2017). Banks are expected to play a dual role in relation to the sustainability of the financial sector. The internal role is related to the activities carried out in the normal course of business, while the external role refers to the inclusion of different ESG risks in their lending, financing, and investing decisions (Buallay et al., 2020). Directly or indirectly, corporate social responsibility (CSR) activities contribute to the sustainability of society while promoting competitiveness (Siueia et al., 2019). Friede et al. (2015) found that the business case for investing in ESG is empirically sound, on a meta-analysis conducted on more than 2000 studies. Environmental, Social, Governance (ESG), and financial performance of European banks 482 Vol. 19, No. 3 Still, further work is needed to better understand the processes behind ESG performance within the strategy of a company (Huang, 2019). Considering that previous studies have mixed results on the association between ESG performance and financial performance, we highlight the fact that further work is still needed to better understand these relationships. To the best of our knowledge, there are no studies that specifically analyze these variables based on different classifications of the European banking sector. Thus, we close the research gap through our contribution that is focused on analyzing the variables that measure ESG performance (environment, social, and governance), in addition to the financial performance of banks. We use several classifications related to the countries in which banks are headquartered. We considered the main classification from Reuters: Developed versus Emerging Europe. However, the criterion applied by Reuters is not described in the official methodology, thus being unclear. We propose three other classifications. The first classification is based on four geographical regions: Western, Southern, Northern, and CEE. The second classification is based on the functional currency of the respective countries: Eurozone and non-Euro countries. The third classification is based on a cluster analysis that produces two groups of European countries: small GDP – large population and large GDP – small population. We contribute to practice by highlighting the significant differences between different parts of Europe. These results may be used in assessing the actions implemented by European banks and identifying new opportunities to achieve greater levels of ESG and financial performance. Therefore, the results of this study are relevant to policymakers, regulatory bodies, banking managers, auditors, and investors. We contribute to theory by proposing three more classifications of banks within Europe, extending the first classification found in Thomson Reuters, and offering further insights on ESG and financial performance, in line with previous studies. Our research is structured as follows. The literature review serves for developing the hypotheses, while the sample, data sources, variables, and related definitions are detailed in the methodology section. The results of independent group tests are followed by the implications and conclusions of the study in the final part of the paper. 2. Literature review The environmental, social, and governance practices are significant to all stakeholders within the banking sector. Good social and governance performance Accounting and Management Information Systems Vol. 19, No. 3 483 has a significant role in reducing financial risk and reinforcing the banks’ commitment to good governance and environmental practices (Chollet & Sandwidi, 2018). If the risk is low, financial uncertainty decreases, which leads to improving CSR involvement. Financial performance plays a significant role in the long-term decisions of management, as banks that report high levels of profitability do not worry about their near-term survival and can support CSR activities. Nizam et al. (2019) mentioned that establishing ESG policies is a process that incurs costs for setting the ESG framework, due diligence, and current disclosure policies. Building up a strong ESG performance is expected to generate costs that shall be compensated by revenue stability, lower business risks, positive performance effects, and significant added value (Buallay, 2019a). Previous studies in the literature have analyzed ESG performance and corporate scandals. A study by Buallay et al. (2020) on 882 banks from both developed and developing countries after the financial crisis of 2008, found that ESG performance has had a significant role in improving both accounting and market-based performance of banks located in developing countries. These results provide support for the value creation theory linked to non-financial indicators of corporate governance quality, risk management, and environmental and social performance. The results of Shakil et al. (2019) on 93 banks from emerging markets showed a positive association between the banks’ environmental/social performance and their financial performance. Moreover, Buallay et al. (2020) found that some developing countries are on the way of becoming a substantial contributor to global sustainability. In another study, Szegedi et al. (2020) mentioned that Pakistan, an emerging country, made an effort to develop its financial culture, adopting CSR practices. These practices were also analyzed in Turkey, an emerging country, by Akdogan et al. (2020). The results showed that social structure and economic development level represent key drivers in understanding CSR. Ehrenhard and Fiorito (2018) analyzed the ethical values of the 25 largest European banks following the financial crisis. Integrity and customer focus were the most common values, and 15 banks were involved in different corporate scandals. Corporate controversies implied the facilitation of money laundering, dark pool activities, unauthorized trades, tax evasion, manipulation of both Libor and Euribor interbank interest rates, and the facilitation of different transactions with either individuals or companies from sanctioned countries. On the other hand, their results showed that banks with inclusive social principles such as solidarity, equality, and respect did not face any major scandal. Different authors studied ESG performance at a disaggregated level. Buallay et al. (2019a) found that stakeholders of banks in the European Union take into consideration environmental practices when deciding on future investments, and Environmental, Social, Governance (ESG), and financial performance of European banks 484 Vol. 19, No. 3 the results show that this has brought wealth to the banking sector. Jo et al. (2015) asserted that customers in Europe also react more positively to environmental management. Thus, a greater and more significant effect is observed in the case of European banks compared to other regions, such as the Asia Pacific. Although it is true that the banking sector does not generate severe issues concerning environmental pollution, Miralles-Quirós et al. (2019) found that European banks are seeking to achieve savings on electricity, water, and use of paper. According to the legitimacy theory, the rights of the public must be considered by companies, in addition to shareholder rights. Thus, several authors (Buallay, 2019b; Forcadell & Aracil, 2017) have found that ESG involvement can strengthen a bank’s legitimacy by demonstrating that profitability goes together with meeting the needs and expectations of stakeholders. However, CSR activities are sometimes controversial because of the high costs incurred in the process (Shen et al., 2016). Social responsibility is a mechanism that has a significant contribution to restoring the banks’ tarnished reputation after the economic crisis from 2008 (Buallay, Fadel, Alajmi et al., 2020; Forcadell & Aracil, 2017). Instead of unidirectional communication and traditional legitimization strategies, banks need to disclose sufficient information regarding the effective involvement with stakeholders. Thus, Venturelli et al. (2018) found that stakeholder engagement represents a key strategic process, and a good indicator proving the commitment of banks to corporate social responsibility. Additionally, by satisfying the needs of stakeholders, companies may increase their profitability and improve their reputation (Buallay, Fadel, Alajmi et al., 2020). Sustainability reporting is focused on creating future value (Buallay, 2019a), but CSR actions without proper disclosure would have little or no contribution to the banks’ financial performance (Oyewumi et al., 2018). CSR disclosure plays a significant role in a company’s debt placement decisions (Tan et al., 2020), and the intensity of CSR disclosure is associated with more persistent above-industry- median gross and operating margins (Cannon et al., 2020). In a study performed on the Ghanaian banking sector, corporate social responsibility practices are found to be a strategic tool that may contribute to financial performance (Ofori et al., 2014). Conversely, Esteban-Sanchez et al. (2017) asserted that a strategic approach to CSR is not always implemented by banks. Relations with employees have a positive impact on financial performance, while community involvement and product responsibility are negatively associated with financial performance. A country’s system of corporate governance is able to improve earnings quality by increasing the supervision of companies and mitigating earnings management (Zehri & Zgarni, 2020). Esteban-Sanchez et al. (2017) report a positive association between governance quality and financial performance. Also, disclosure of Accounting and Management Information Systems Vol. 19, No. 3 485 corporate governance is important within the banking sector. Better levels of governance disclosure are found by Buallay (2019b) within banks located in countries with high GDP. Such disclosures are costly items to prepare, as observed by Johansen and Plenborg (2013). According to the agency theory, the alignment between the interests of managers and shareholders represents a mechanism of strong corporate governance, enhancing the company’s value. Grove et al. (2011) applied this theory to the banking sector, expecting differences between financial institutions and other industrial companies, due to the regulatory environment specific to US banks. The results suggest there is a need for an extended version of agency theory that would better describe the banking sector. Consequently, agency conflicts might arise in different situations and can be reduced while building trust in relationships with stakeholders. Esteban-Sanchez et al. (2017) also rely on stakeholder theory to explain the accountability of banks not only to the shareholders but also to a wider audience. Therefore, considering the significance of ESG performance in the literature, together with the four classifications of our research (i.e. Developed Europe versus Emerging Europe; Eurozone versus non-Euro countries; Western, CEE, Northern and Southern banks; small GDP – large population and large GDP – small population clusters), our first hypothesis is: H1. There are significant differences in ESG performance between banks classified according to the four criteria in our study. Various accounting indicators related to profitability, liquidity, or financial stability of companies are significant and regularly used by debtholders, as observed by Trpeska et al. (2017) in a study performed on banks in Macedonia. Several studies analyzed the relationship between ESG performance and different variables that measure banks’ financial performance, such as size, liquidity, or capital adequacy. In most cases, size is measured as the logarithm of total assets or the number of employees. Financial performance can be influenced by either internal or external factors. An example of an external factor would be political interference, as observed by Samiul et al. (2019). Beccalli et al. (2015) analyzed 103 European listed banks for the period 2000- 2011. Total assets represent a major indicator of economies of scale within the banking system. Extremely large banks are also “too big to fail” and are of primary interest when analyzing economies of scale. The costs of ESG disclosure can be reduced in the case of larger banks because they also have economies of scale in the governance process (Nizam et al., 2019). Environmental, Social, Governance (ESG), and financial performance of European banks 486 Vol. 19, No. 3 Buallay et al. (2020) observed that large banks are monitored more closely and are under greater pressure. Such banks can obtain a better financial performance, as they are more efficient and have more resources, including the possibility to recruit skilled managers (Buallay, 2019a). Also, Platonova et al. (2018) linked ESG performance to financial performance and found that the effective use of resources is a result of social responsibility in Islamic banks. The liquidity ratio represents another determinant of economies of scale. A higher ratio leads to lower liquidity risk, thus to greater economies of scale, as observed by Beccalli et al. (2015). In the same study on European banks, the authors highlighted the importance of capital strength, mentioning that tougher capital requirements lead to a decrease in costs, especially in the case of larger banks. Also, capital adequacy represents a driver of a bank’s responsibility that signals financial health (Gonenc & Scholtens, 2019). Moreover, the findings of Pinto and Picoto (2018) show that the capital adequacy of European banks was managed through loan loss provisions after the financial crisis of 2008. These losses have a significant impact on the asset quality of the banking sector, thus on financial performance. In line with the results of previous studies on the significance and implications of financial performance, our second hypothesis is: H2. There are significant differences in financial performance between banks classified according to the four criteria in our study. The starting point of our research is represented by the classification of countries in Developed versus Emerging Europe, according to Reuters. Afterward, we propose three different classifications that, in our opinion, are more transparent. Ferri et al. (2015) published a similar study. The authors started from the ownership classification as given by Bankscope, then revised it after carefully reviewing all the available data. The authors created two new ownership classes: commercial or profit-maximizing banks (“shareholder banks”), and cooperative and savings banks (“stakeholder banks”). The results showed that shareholder banks were profitable before the crisis, while stakeholder banks had a better loan quality before and after the crisis. To the best of our knowledge, there are no studies that address ESG, financial performance, and their related indicators, by using the classifications that we propose to be applied to the European banking sector. Thus, this study fills the gap in the literature regarding significant differences between Developed Europe versus Emerging Europe, Eurozone versus non-Euro countries; Western, CEE, Northern Accounting and Management Information Systems Vol. 19, No. 3 487 and Southern banks; and small GDP – large population versus large GDP – small population countries. Moreover, our study includes results on controversies and audit fees, areas of interest for different stakeholders. 3. Methodology 3.1 Sample and data sources The population includes banks with headquarters in countries located in Europe. The main sources of data are Thomson Reuters, World Bank statistics, and EuroVoc – maintained by the Publication Office of the European Union. In the process of collecting data, we identified the countries located in Europe for which ESG data exists in Thomson Reuters. To obtain a comprehensive list of countries to be further analyzed, we extracted an overview of ESG scores for Emerging Europe and Developed Europe. Secondly, we performed a cross-check to determine a complete and accurate population. We did not find two countries (Cyprus and Malta) in either Emerging or Developed Europe categories managed by Reuters. We compared the GDP of these countries with the GDP of others, such as the Czech Republic. Also, we observed that Cyprus has the second-lowest population in Europe. Therefore, we included these countries in Emerging Europe. Thomson Reuters considered three other countries to be part of Emerging Europe: Azerbaijan, Georgia, and Turkey. As a result of this phase, Emerging Europe includes 27 countries and Developed Europe includes 25 countries. Thirdly, we extracted ESG scores for 2018 for 52 countries and we obtained the following results: Developed Europe includes a total of 234 banks, out of which 150 had no ESG data available and 84 banks qualified for further analysis; Emerging Europe includes a total of 169 banks, out of which 141 banks had no ESG data available and 28 banks qualified for further analysis. We further analyzed the qualifying population of 112 banks and we excluded four banks from the sample (two banks had no ESG data available for 2018 and two other banks are considered outliers because of the values registered by ESG combined, less than 10). Finally, the research baseline includes a total of 108 banks (81 from Developed Europe and 27 from Emerging Europe) and we considered the selection criterion to be represented by the availability of ESG combined score for 2018. The Refinitiv methodology does not contain Thomson Reuters’ criteria for differentiating between Developed Europe and Emerging Europe. The authors have written to Reuters to ask for further clarification regarding the criterion for this taxonomy. As of the date of paper submission, Reuters has not provided the requested information. Environmental, Social, Governance (ESG), and financial performance of European banks 494 Vol. 19, No. 3 Western banks are also significantly larger than Northern banks and CEE banks. Also, Western banks have significantly higher leverage than CEE banks, which is also the case for audit fees. Western and Northern banks are similar in terms of capital adequacy, but they have significantly higher ratios than Southern and CEE banks. However, there is no significant difference in terms of ROA for the four groups, while the variance for ROE is too large for the test to determine any significant differences for the entire sample. Table 5. Results of one-way ANOVA for geographical regions in Europe Variables Western M (SD) N = 33 Southern M (SD) N = 37 Northern M (SD) N = 17 CEE M (SD) N = 21 F ESG_comb. 48.7 (12.7) 55.8 (13.9) a 43.4 (13.7) b 48.3 (19.9) 3.145* Environment 52.9 (35.1) 54.8 (28.8) 57.7 (29.4) 35.7 (26.6) 2.184 Social 62.7 (22.3) 68.5 (17.3) a 51.5 (19.3) b 50.7 (23.8) b 4.690** Governance 67.9 (18.7) a 56.5 (22.8) 48.3 (19.7) b 53.1 (22.2) 4.088** Controversies 42.9 (39.9) a 28.5 (31.8) 25.0 (37.5) a 4.9 (14.7) b 5.672** Employees 42803 (58376) a 25769 (40656) a 6780 (8732) b 29722 (64099) 2.074 Total_assets 481582 (633779) a 171094 (297982) 103954 (172800) b 49486 (87806) b 6.590** ROA 0.59 (0.60) 0.63 (0.71) 1.08 (0.74) 0.87 (2.24) 0.877 ROE 7.44 (5.11) a 7.35 (7.66) a 11.94 (3.9) b -0.64 (48.31) 1.133 LEV 14.7 (6.4) a 11.9 (4.3) 12.2 (4.8) 9.6 (4.8) b 4.314** CAPADQ 19.39 (5.8) a 16 (2.9) b 19.76 (2.3) a 16.24 (4.3) b 5.904** Afees 22.0 (36.1) a 8.5 (21.5) 1.1 (1.4) b 0.8 (0.5) b 3.555* Notes. The F statistic is significant at * p < 0.05; ** p < 0.01 We use the Games Howell post hoc test for groups where homogeneity of variances is not assumed. Differing superscripts (a b c d) indicate significant differences between the respective groups at * p < 0.05 The results of independent group tests presented in Table 6 show that the social pillar scores (Social) and leverage (LEV) are significantly higher for banks that are part of the Eurozone compared to entities located in non-Euro countries. Conversely, return on assets (ROA) is significantly higher for banks with headquarters located in Non-Euro countries compared to Eurozone. Table 6. Independent group tests between banks in Eurozone versus non-Euro countries Variables Eurozone (n = 48) Non-Euro (n = 60) t-statistic M SD M SD ESG_comb. 53.09 13.98 47.97 16.12 1.738 Environment 56.57 29.67 46.59 30.14 1.686 Social 66.84 18.44 55.60 22.74 2.835** Governance 59.94 21.98 56.53 21.93 0.800 Accounting and Management Information Systems Vol. 19, No. 3 495 Variables Eurozone (n = 48) Non-Euro (n = 60) t-statistic M SD M SD Controversies 34.78 35.21 22.19 34.52 1.866 Employees 33574 49164 24897 50657 0.896 Total_assets 324110 487766 157864 366712 1.960 ROA 0.458 0.527 0.954 1.441 -2.469* ROE 6.5485 6.543 6.5483 28.966 0 LEV 14.03 5.84 11.01 4.69 2.976** CAPADQ 17.70 5.61 17.65 3.43 0.047 AFees 11.93 21.93 10.23 30.17 0.289 Notes. Group differences are significant at * p < 0.05; ** p < 0.01. For AFees, Eurozone has 39 cases, and non-Euro countries have 42 cases. Table 7 shows that the ESG combined score (ESG_combined) and the social pillar score (Social) are significantly higher in the case of banks located in countries part of small GDP per capita – large population cluster. The capital adequacy ratio (CAPADQ) is significantly lower in the same cluster, which also features significantly larger banks in terms of the number of employees. Table 7. Independent group tests between banks in the two Wealth-Population clusters Variables ↓GDPpc ↑Pop (N = 75) ↑GDPpc ↓Pop (N = 33) t-statistic M SD M SD ESG_comb. 52.20 15.22 45.79 14.93 2.026* Environment 50.55 29.93 52.53 31.26 -0.304 Social 63.81 21.47 53.28 20.30 2.387* Governance 60.33 22.80 52.86 19.06 1.644 Controversies 29.02 35.21 24.99 35.67 0.546 Employees 35965 57614 12363 16408 3.260** Total_assets 268666 493006 147853 218852 1.764 ROA 0.649 1.298 0.924 0.703 -1.141 ROE 4.875 26.053 10.349 4.328 -1.197 LEV 12.351 5.789 12.366 4.582 -0.014 CAPADQ 17.078 5.09 19.040 2.28 -2.116* AFees 14.16 31.72 5.48 10.21 1.812 Notes. Group differences are significant at * p < 0.05; ** p <0.01. For AFees, ↓GDPpc ↑Pop has 52 cases, and the ↑GDPpc ↓Pop group has 29 cases. 5. Discussions and conclusions Our research analyzes different ESG and financial variables for banks located in European countries according to four classifications. We started with the classification proposed by Thomson Reuters which does not include details in the methodology published on the official website. Therefore, we aim to observe what Environmental, Social, Governance (ESG), and financial performance of European banks 496 Vol. 19, No. 3 are the main differences between Developed and Emerging Europe and the other three proposed classifications. In terms of the ESG combined score, there are no significant differences between Developed and Emerging Europe. We obtained the same results when analyzing ESG combined between Eurozone versus non-Euro countries. However, compared to the Reuters classification, banks in Southern European countries and the small GDP – large population cluster have a significantly higher ESG combined score, which may also be correlated with the results on the Social pillar score. We did not observe significant differences in the Environmental pillar score in Developed versus Emerging Europe. We do not obtain results that are statistically significant for the four geographical regions in Europe, respectively the Eurozone versus non-EURO, or the two Wealth-Population clusters. Thus, our results show the same trend as the one obtained when analyzing the classification of Thomson Reuters. This is in line with the study of Jo et al. (2015), considering that European customers react positively to environmental management and there is relative uniformity in this domain. For the Social pillar score, there are no significant differences between Developed and Emerging Europe. However, the Social performance score of Southern banks is significantly higher than the score of Northern and CEE banks. Similarly, banks in Eurozone countries have significantly higher social scores than banks in non- Euro countries. Thus, differences arise are dependent on various factors, such as relations with employees, community involvement, or product responsibility. The Governance pillar score and Controversies score are significantly higher in Developed Europe compared to Emerging Europe. We obtained significant differences based only on geographical criteria. The Governance pillar score and ESG controversies score for Western banks are significantly higher than the ones of Northern banks. This result brings more detail to the analysis of Developed versus Emerging Europe, as banks classified in Western, respectively Northern regions, are all part of Developed Europe according to Thomson Reuters collected data. The total assets of banks in Developed Europe are significantly higher compared to banks in Emerging Europe, while the number of employees is also higher, but not significantly different. Also, the total assets of Western banks are significantly higher than Northern and CEE banks, while the number of employees of Western banks is higher, but not statistically significant. The same trend is found for the two size variables in the case of the Eurozone versus non-Euro countries, the differences being statistically not significant. However, the number of employees Accounting and Management Information Systems Vol. 19, No. 3 497 from the small GDP – large population cluster is significantly higher than the average number of bank employees in large GDP – small population countries. The ROA of banks in Emerging Europe is higher, but not statistically different, compared to Developed Europe, while in the case of ROE the relationship is inverse. The highest ROA and ROE are observed, on average, in the case of Northern banks and, respectively, the large GDP – small population cluster. The ROA and ROE do not significantly differ when comparing Southern with Northern banks. The results of the independent group tests show no differences in the case of ROE when comparing Eurozone with non-Euro countries. The leverage and capital adequacy of banks in Developed Europe are significantly higher than those of entities in Emerging Europe. We report higher leverage for Eurozone banks compared to non-Euro countries, but there is no difference in terms of capital adequacy for banks in these two groups. Differences arise when analyzing the geographical classification. The leverage of Western banks is significantly higher than the leverage of CEE banks, while Northern and Western banks have higher capital adequacy than Southern and CEE banks. Entities in Developed Europe and the large GDP – small population cluster have significantly higher capital adequacy than their peers. Thus, different parts of Europe encounter better financial health compared to others, in line with competitive advantages gained by some countries. A bank’s financial stability represents a signal of accountability linked to ensuring an acceptable capital adequacy level (Gonenc and Scholtens, 2019). The acceptable level of the ratio, usually, is given by the regulator. As expected, the audit fees are significantly higher for banks in Developed Europe. Similarly, the audit fees of Western banks are significantly higher than the audit fees or Northern and CEE banks. The Reuters classification includes Western, Northern, and some Southern banks in Developed Europe, but there is no significant difference between Western and Southern banks. This study contributes to the literature by highlighting the differences between variables in the case of four classifications, thus addressing the research gap. The first classification is the one proposed by Thomson Reuters, analyzing ESG performance and related pillars, including the Controversies score, by comparing Developed Europe with Emerging Europe. Based on the methodology published by Thomson Reuters on its official website, it can be concluded that this classification lacks transparency, as it is not clear what is the criterion used to obtain this split. Thus, we analyze the variables by proposing three other classifications. The first one is based on four geographical regions: Western, Southern, Northern, and CEE. The second classification is based on the functional currency of countries in which the banks’ headquarters are located: Eurozone and non-Euro countries. The third Environmental, Social, Governance (ESG), and financial performance of European banks 498 Vol. 19, No. 3 classification is based on a cluster analysis that produced two groups of European countries: small GDP – large population and large GDP – small population. The evidence from this study may help banks in identifying where the highest values of ESG components, controversies, performance indicators, and audit fees are found. Also, banks and regulators could see more clearly which are the components where improvement or actions are still needed to reach and maintain higher ESG and financial performance, and thus higher value for the shareholders. Future research may focus on the impact the new Coronavirus will have on the banking sector. ESG and financial performance are expected to change significantly due to the pandemic crisis. Moreover, the business plans and set of actions adopted by banks to face the Coronavirus will reshape workforce norms, organizational culture, digital skills, and regulatory requirements. Thus, new challenges arising from the Covid-19 crisis in different geographical regions of Europe may be subject to extensive investigations. 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