The Impact of ESG Score on the Value Relevance of Fair Value Hierarchy : Evidence from European Banks

In this paper, using hand-collected accounting data on 154 European banks for a period ranging from 2010 to 2018, we investigate the impact of banks’ ESG scores on the value-relevance of fair value hierarchy in financial instruments. Our findings are multi-faceted. On the one hand, banks that possess an ESG score are valued with a price to tangible book value (PTBV) multiple higher than non-covered banks and the presence of the ESG score is associated with lower (higher) value-relevance of Level 1 (Level 2 and 3) fair value. This is consistent with the view that the ESG score lowers information asymmetries and mitigates the opacity of lower levels of the FVH. On the other hand, the value relevance of Level 2 and 3 FVH levels decreases in the ESG score. This surprising finding casts doubt on common perceptions of the value assigned by stock markets to ESG performance measures, implying that stock market investors either do not treat the ESG score as a reliable measure of ESG performance, or do not associate positive ESG performance to greater corporate transparency and trustworthiness