ESG activities and banking performance: International evidence from emerging economies

We examine the relationship between environmental, social, and governance (ESG) activity and bank value. Our sample includes 251 banks over the period 2011–2017 from 44 emerging economies. We employ System Generalized Method of Moments (GMM) estimation to control for endogeneity. We find a non-linear relationship between ESG activity and bank value. Our results indicate low levels of ESG activity positively impact bank value. However, there are diminishing returns to scale. Environmentally friendly activities have the greatest effect on bank value. We examine the channels through which ESG activity impacts bank value and find a positive relationship between ESG activity and both cash flows and efficiency. We find ESG activity negatively affects the cost of equity but has no effect on the cost of debt. Our results explain why proponents of both stakeholder theory and trade-off theory have found evidence to support their predictions of the relationship between ESG activity and bank value.