ESG and financial performance of banks in the MENAT region: concavity–convexity patterns

El Khoury R., Nasrallah N., Alareeni B.

Journal of Sustainable Finance and Investment, vol.13, no.1, pp.406-430, 2023 (ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 13 Issue: 1
  • Publication Date: 2023
  • Doi Number: 10.1080/20430795.2021.1929807
  • Journal Name: Journal of Sustainable Finance and Investment
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus
  • Page Numbers: pp.406-430
  • Keywords: MENAT countries, bank accounting and market performance, ESG disclosure, environmental score, social score, governance score, CORPORATE SOCIAL-RESPONSIBILITY, GOVERNANCE PERFORMANCE, COMMERCIAL-BANKS, SUSTAINABILITY, PROFITABILITY, IMPACT, DETERMINANTS, DISCLOSURE, PAY, REQUIREMENTS
  • Middle East Technical University Affiliated: Yes

Abstract

© 2021 Informa UK Limited, trading as Taylor & Francis Group.This study aims to investigate the impact of Environmental, Social and Governance (ESG) on bank performance (FP) in the Middle East, North Africa and Turkey (MENAT) region. The sample consists of 46 listed banks between 2007–2019. FP is measured through accounting (Return on Assets Return on Equity) and market indicators (Tobin’s Q Stock Return). We test the effect of ESG and its quadratic term on FP by controlling for bank-specific, macroeconomic and financial development variables. Our results support the presence of a non-linear ESG–FP relationship. ESG incremental investments remain beneficial till reaching an inflection point. Interestingly, the financial development variables are significant, while ESG pillars follow different patterns. Governance pillar has a concave relationship with accounting performance while environmental pillar has a convex relationship with the market return. The ESG–FP relationship depends on three vectors: pillars; measure of FP; and level of ESG. Banks should determine ESG turning points to rationalize their investments and contemplate efficient returns.