Banks' fossil fuel divestment and corporate governance: The role of board gender diversity

Banks are key firms in the green transition, as they can influence corporate behaviours by considering and integrating extra-financial variables in the criteria for choosing financing and investment decisions.

Organisational factors, such as gender diversity on boards of directors, are potential catalysts for sustainable behaviours and choices. This study analyses the relationship between female presence on the boards of directors of large banks and the amount of bank financing to the fossil fuel sector, used as an indicator of banks' commitment to the "decarbonisation" of the system.

Through a panel data analysis on the annual levels of financing to the fossil fuel sector from 2016, when the Paris Agreement came into force, to 2022, of the 54 largest banks in the world, we demonstrate the existence of a negative relationship between gender diversity on boards of directors and the amount of bank financing to fossil fuel companies. This finding holds even after several robustness tests were conducted.

In other words, a higher percentage of women on banks’ boards of directors makes adopting fossil fuel divestment policies more likely, supporting the theory that gender diversity is critical to promoting environmentally and socially responsible approaches.

Additional analysis also reveals that gender diversity on boards of directors emerges as a factor that can significantly influence fossil fuel divestment in those countries that perform less environmentally. In other words, when external and internal stakeholder pressure to adopt pro-environmental strategies is reduced due to contextual factors, the importance and effect of women’s positive environmental attitudes and behaviours emerge with greater emphasis.

The study shows that broader female representation on boards of directors is associated with greater corporate attention to environmental sustainability. This confirms established theories on which traits typically related to women, such as empathetic behaviour and social sensitivity, can promote socially and environmentally responsible actions and good environmental performance by banks.

Furthermore, in line with Upper Echelon Theory and Resource Dependency Theory, our findings highlight the role of individual characteristics of board members in shaping firms’ commitment to environmental issues and improving the representation of shareholders’ and stakeholders’ interests. The findings may strengthen managers’ belief that greater gender diversity on boards can accelerate the transition towards a business model prioritising environmental goals. Increasing the presence of women on banks’ boards could facilitate the energy transition.

To discourage financing in “brown” sectors, policymakers could encourage gender diversity in the composition of banks’ boards. Communities, environmentalists, and shareholders actively promoting pro-environmental strategies could lobby for broader female representation on board composition. Similarly, institutional investors can draw significant insights from this paper to inform and guide their investment oversight and management responsibilities.

The study contributes to the literature on corporate governance and environmental management. Furthermore, the study fuels the debate on which strategy is more effective for financial institutions in the fight against climate change: divestment or risk management/engagement. The fact that gender diversity on the board of directors encourages divestment from the fossil fuel sector does not guarantee that this is the optimal strategy for banks, as it may entail more significant risks from reduced portfolio diversification and higher compliance costs. Alongside active approaches such as divestment, there are passive approaches involving the analysis of the counterparty's carbon footprint or ESG integration in decision-making processes that could facilitate a smoother and less risky transition.

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Authors at the Department of Management

Simona Cosma – Professore Associato

Academic disciplines: Financial Markets and Institutions

Teaching areas: Risk management and derivatives, Economia delle imprese di assicurazione, Strumenti e mercati finanziari

Research fields:  Biodiversity Finance, Corporate Governance

Associate Professor whose research interests focus on risk management of financial institutions, corporate governance and sustainability. He worked for many years as an Affiliated Professor at SDA Bocconi School of Management. She currently serves as an Independent Director at Banca Popolare Pugliese, where she is also a member of the risk committee and the Board's delegate for sustainability.