Sustainability or ESG issues are increasingly discussed in banking and finance. Anecdotal evidence shows a potential existence of reputational penalties for banks arising from lending to companies or financing projects which are controversial with regards to sustainability. By merging bank lending data with data for reputational risk, this work aims to analyze the effect of financing ecologically or otherwise controversial companies or projects on the reputational risk of banks.

Examining different concepts of reputational risk, the results show a positive (increasing) effect of financing controversial companies on bank’s reputational risk in terms of a worsened perception among stakeholders. In terms of impacts of this worsened perception from lending to controversial companies on bank value, the results suggest a potential impact but are not robust to different measures of bank value. All in all the findings of this work indicate that the sole focus of using industry categorizations as a measure for sustainability risks of potential lenders are incomplete with regards to the impact on reputational risk of banks.