Banking on sustainability: assessing the impact of ESG performance on global bank stability
Date
2025-06-08
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Abstract
The increasing global emphasis on Environmental, Social, and Governance (ESG) practices has transformed how financial institutions approach long-term value creation and risk management. This study examines the impact of ESG performance on global bank stability from 2014 to 2021 using OLS, FE, RE, and SGMM models. ESG is measured as a composite index, and bank stability is proxied by the Z-score. Interaction terms assess variations by development level, ESG intensity, profitability, capital adequacy, liquidity, size, income diversification, and the COVID-19 crisis. Findings indicate that ESG performance is significantly and negatively associated with bank stability in the short term under SGMM, consistent with Overinvestment Theory. While OLS results suggest benefits from high ESG intensity, these do not hold under stricter estimators. ESG’s destabilizing effect is most pronounced in developed countries, low-profit banks, and small institutions, while developing countries and moderately profitable or diversified banks exhibit modest gains that lose significance in SGMM. ESG also failed to enhance stability during the COVID-19 crisis. The study underscores ESG’s uneven effects, urging context-specific strategies. Limitations include unbalanced panels and self-reported ESG data. Future research should disaggregate ESG pillars, incorporate longer timeframes, and explore regulatory heterogeneity to better understand ESG’s complex role in banking resilience.
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ESG Performance, Bank Stability, Z-score, Overinvestment Theory, Developing Countries, Profitability, Financial Resilience, Panel Data, COVID-19