Journal of Entrepreneurship, Management and Innovation (2025)

Volume 21 Issue 4: 54-75

DOI: https://doi.org/10.7341/20252143

JEL Codes: G21, G23, Q51, Q54

Irena Pyka, Full Professor, Department of Banking and Financial Markets, Faculty of Finance, University of Economics in Katowice, ul. 1 Maja 50, Katowice, 40-287, Poland, e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.
Renata Karkowska, Ph.D., Hab., Associate Professor, Faculty of Management, University of Warsaw, ul. Szturmowa 1/3, Warsaw, 02-678, Poland, e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.
Aleksandra Nocoń, Ph.D., Assisstant Professor, Department of Banking and Financial Markets, Faculty of Finance, University of Economics in Katowice, ul. 1 Maja 50, Katowice, 40-287, Poland, e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it.

Abstract

PURPOSE: The ESG (Environmental, Social, and Corporate Governance) activities are a key element of the transformation of the financial system, particularly in the face of challenges arising from the 2007-2009 crisis and the COVID-19 pandemic. Consequently, the integration of environmental, social, and corporate governance aspects has been recognized as essential in shaping economic processes. This study contributes to the ongoing debate on ESG activities in the banking sector. The research aims to assess the impact of ESG implementation on the profitability and financial stability of commercial banks globally. The study examines whether ESG-related activities contribute to an increase in the market value of banks, reflecting higher profitability and improved financial stability. METHODOLOGY: The study encompasses financial and ESG data from 384 commercial banks across 62 countries worldwide, spanning the period from 2012 to 2021. The research sample is limited to banks for which ESG data is available in the Refinitiv Eikon database. A panel regression method is used to achieve the research objective. RESULTS: The results reveal a statistically significant relationship between the implementation of ESG activities and banks’ financial performance. The research indicates a negative impact of ESG activities, particularly in the social and governance dimensions, on banks’ profitability, measured by ROA and ROE. This negative relation may result from the substantial costs related to implementing ESG initiatives, regulatory pressures aimed at enhancing environmental protection, and the risks associated with financing green investments. Moreover, the uneven influence of the individual E, S, and G components may also contribute to the observed financial outcomes. Conversely, certain ESG activities, especially those related to the social dimension, are positively linked to banks’ financial stability, as reflected by the Z-score index, suggesting increased institutional resilience to systemic risk. These findings suggest a growing disparity between the short-term financial performance and long-term stability of banks involved in ESG activities. IMPLICATIONS: The study highlights the importance of ESG in enhancing bank stability and supporting sustainable finance. It provides a theoretical contribution by linking ESG with banks’ financial resilience and a practical contribution by promoting regulations and greater transparency in ESG-based business decision-making. Banks and policymakers can utilize the obtained findings to design strategic frameworks that integrate ESG factors into profitability measures, risk management processes, capital adequacy assessments, and long-term value creation. By incorporating ESG metrics into supervisory practices and disclosure requirements, financial institutions may enhance resilience against systemic shocks while fostering trust among stakeholders and aligning with global sustainability goals. ORIGINALITY/VALUE: This study makes a unique contribution to the literature by demonstrating a direct relationship between ESG practices and the profitability and stability of commercial banks. It extends previous research on the link between ESG activities and banks’ operational activities, particularly financial security.

Keywords: ESG (Environmental, Social, and Governance), ESG activities, sustainable finance, responsible banking, commercial banks, banking sector, bank profitability, financial performance, return on assets (ROA), return on equity (ROE), financial stability, systemic risk, Z-score, corporate governance, environmental risk, social responsibility, risk management, capital adequacy, global banking, panel regression, Refinitiv Eikon

INTRODUCTION

In December 2016, the European Commission appointed a group of experts on sustainable finance (High-Level Expert Group on Sustainable Finance, HLEG) to develop an overarching and detailed EU strategy for sustainable finance, including the identification of actions to direct capital flows towards sustainable investments and to ensure stability of the financial system in the face of environmental risks (European Commission, 2018). In 2018, the group published a report that presented a comprehensive view of European sustainable finance and indicated the imperatives for the future financial system. Firstly, the need to increase the involvement of finance in the long-term socio-economic development of the world economy was noticed. Secondly, it was emphasized that there is a need to improve financial stability by increasing awareness of ESG (Environmental, Social, and Corporate Governance) when making investment decisions. Following the intention contained in the documents: United Nations Environment Programme (UNEP) and Principles for Responsible Investment (PRI), ESG can be defined as follows: E (Environmental) - as environmental issues related to natural environment and natural systems; S (Social) - as social issues related to the rights of people and communities; and G (Corporate Governance) - as management issues related to corporate governance. The concept of ESG quickly became the subject of lively international discussion and numerous studies and scientific publications. Contemporary research areas regarding ESG activity mainly focus on: (1) the identification of the impact of environmental, social responsibility and corporate governance factors on a company’s financial results and value, (2) ESG risk management, (3) the relation between ESG and sustainable development as well as corporate social responsibility (CSR) and (4) the importance of ESG strategy in the face of changing preferences and tastes of stakeholders.

Regulatory pressure and growing expectations of owners and stakeholders are leading to the transformation of business models. That’s why non-financial ESG indicators are also becoming increasingly important in the banking sector. Banks play a strategic role in financing projects aimed at sustainable development, which makes taking ESG risks into account in investment and financing activities not only a necessity but also an important element of their long-term strategy. In the face of dynamic regulatory changes and growing social awareness, verifying banks’ adaptability to the challenges of ESG activities allows us to better understand which factors support and inhibit their ability to achieve profitability and financial stability. The research also enables the preparation of recommendations in formulating principles and tasks for the effective allocation of bank capital in implementing ESG strategies in the banking sector. Therefore, the following research questions (RQs) were formulated:

RQ1: How do ESG-related activities undertaken by banks affect their performance?

RQ2: Does the growing banks’ involvement in ESG activity positively affect their financial stability?

RQ3: To what extent do the individual ESG pillars differ in their influence on banks’ profitability and financial stability?

The previous results of empirical research on the relation between ESG activity and the value of non-financial and financial companies are not unambiguous. Some researchers argue that ESG activity enhances companies’ financial performance (Buallay, 2019; Cheng, Ioannou, & Serafeim, 2013). In particular, they indicate that economic entities that undertake sustainable development practices are characterized by higher profitability, higher market valuation, lower risk, and greater resistance to changes in the economic cycle. In turn, others suggest that investments in ESG activities may incur alternative costs related to inefficient capital allocation (Haans et al., 2016; Heli et al., 2008). In the case of banks with low profitability, identifying relations between ESG activities and profitability may help determine the stability of their income.

This article examines the impact of ESG-related activities and associated disclosure requirements on the performance and financial stability of banking institutions. Based on a sample of 384 commercial banks from 62 countries worldwide, covering the period from 2012 to 2021, the study confirms a relationship between ESG engagement and key indicators of bank stability and performance. The study’s results reveal a consistent negative association between overall ESG performance, especially its social and governance dimensions, and banks’ profitability, measured by ROA and ROE. This suggests that, in the short to medium term, ESG-related activities may impose additional costs and resource allocations that reduce immediate financial returns. Conversely, the environmental dimension does not significantly affect profitability, possibly due to the long-term nature of environmental investments. Regarding financial stability, greater ESG engagement, particularly in the social dimension, is linked to higher stability as reflected by the Z-score index, while environmental activities may have a negative impact.

Our study contributes to the existing literature by examining the relationship between ESG activity and selected aspects of performance and financial stability in the banking sector, a key component of the financial system. Investment in ESG assets has significant spillover effects, benefiting various sectors and entire economies. First, ESG investments promote sustainable business practices, leading companies to implement more environmentally and socially responsible solutions. Such actions not only improve the performance of individual companies but also strengthen financial stability and resilience. Many studies have indicated a positive correlation between pro-green investments and companies’ ESG performance, particularly in terms of environmental and social aspects (Cao et al., 2023; Giese et al., 2019). Secondly, investments that focus on ESG promote innovation because companies, striving to meet ESG criteria, implement new technologies and processes. This innovativeness leads to the development of whole industries and increased efficiency, which benefits the entire economy. The undertaken research shows that ESG and innovation positively impact on the commpanies’ value, however ESG actions not only increase their value but also act as a catalyst for innovation (Jung & Kim, 2022). Ultimately, the emphasis on corporate governance within the ESG framework contributes to greater transparency and stability among companies, which reduces the risk of financial irregularities and corruption, thereby strengthening investor confidence and supporting economic growth. Therefore, integrating ESG principles can initiate broad, positive changes that extend beyond the scope of sustainable investment (Atz et al., 2023).

Despite the growing number of studies on sustainability and the ESG concept, there is a lack of comprehensive and systematic analyses on identifying and explaining relations between ESG activities and banks’ performance and the banking sector’s financial stability level. Most existing studies focus either on broad aspects of corporate social responsibility or on separate research on the impact of ESG on individual elements of financial institutions’ activities, without considering the multidimensional nature of these relations. Moreover, this research often overlooks the analysis of the role of ESG disclosure requirements and transparency as determinants of the market and supervisory institutions’ responses, which limits a comprehensive understanding of the mechanisms by which ESG impacts banking sector stability. This study addresses the identified research gap in the literature by examining the impact of ESG practices in banking institutions and the related disclosure requirements on the stability of the banking sector. This study aims not only to assess the correlation between banks’ ESG engagement and their financial performance, but also to examine how ESG practices can contribute to strengthening the resilience and stability of the banking sector in the context of growing environmental and social challenges.

The research on the impact of ESG on the profitability and stability of the banking sector may have significant theoretical and practical implications. From a theoretical perspective, it will contribute to filling the research gap by deepening knowledge of the role of non-financial factors in the functioning of financial institutions, which will enable a better understanding of the mechanisms by which ESG impacts the performance and financial stability of the banking system. The research may also provide empirical evidence to verify existing theories on sustainable development and systemic risk. In turn, practical implications include providing recommendations for managers, especially in areas that can improve financial stability and the reputation of credit institutions. The research results may also contribute to an increase in the effectiveness of ESG regulations, supporting the sustainable financing of green investments of economic entities. Furthermore, the analysis may increase transparency in the decision-making process regarding sustainable investments in business.

The article consists of the following parts: Introduction – which includes a presentation of the issues discussed in the article, the main objective of the study, and the research questions; Literature review – with a critical analysis of existing domestic and international literature. This section is divided into two parts. The first part refers to the origin and significance of the ESG concept. It encompasses the essence of the ESG concept, as well as the main trends and areas of ESG research prevalent in the literature. The second part presents the current literature on the impact of ESG activity on the performance and financial stability of banks; Methodology – where the data used in the empirical research and the adopted research method are presented; Results and Discussion – which includes the obtained results and a discussion in the context of the results of previous empirical studies, Conclusion – with the main research findings, limitations and directions of further research.

LITERATURE REVIEW

The origin and significance of the ESG concept

Environmental, Social, and Governance (ESG) is a concept that encompasses three criteria for assessing the sustainability performance of economic entities, and has become the subject of global discourse at the beginning of the 21st century (Serafeim, 2021). It refers to the implementation of environmental, social, and corporate governance (ESG) in economic activity, and changes how companies that follow these principles can be analyzed and evaluated (Amel-Zadeh & Serafeim, 2018). It is a set of criteria that investors consider in the investment decision-making process (Friede et al., 2015). ESG is also seen as a set of non-financial factors that can affect the risk and return on investment (Giese et al., 2019). Their integration into the company’s strategy can lead to better risk management and increased stakeholder value (Fatemi et al., 2018). Although publications and scientific achievements in this area have been growing over the last two decades, many problems remain unexplored and worthy of attention. Combining E, S, and G into one term created an acronym whose meaning and function may vary depending on the context, evolve over time, and appeal to various stakeholders.

For the first time, the concept of ‘ESG’ appeared in the debate on sustainable development in the United Nations (UN) report: “Who Cares Wins”, published in 2004 (IFC, 2004). It presented the contemporary context of the ESG concept and indicated how to integrate ESG factors with economic activity. Among the ESG concept’s three basic components are environmental, social, and corporate governance, which have since become the main pillars of its implementation. The report emphasized that environmental, social, and governance factors can significantly impact companies’ financial performance and should be taken into account in investment decisions. Companies that effectively manage ESG aspects can better identify risks and opportunities, which results in the stability of their performance. In turn, enterprises that do not incorporate ESG factors may be more vulnerable to reputational, regulatory, and operational losses. The “Who Cares Wins” report also referred mainly to the financial sector’s role in promoting and implementing ESG principles. As key participants in the financial system, banks are identified as institutions that can influence sustainable development through their credit policies, investments, and risk management methods. Therefore, financial institutions should, on the one hand, promote ESG integration in their activities, but on the other hand, also encourage economic entities – their clients – to improve their results in this area (IFC, 2004).

The dynamic growth of interest in ESG issues was associated with the adoption of the Sustainable Development Goals (SDGs) in 2015, which outlined ways to achieve global sustainable development by 2030 (United Nations, 2015). These goals address global environmental challenges (including depletion of natural resources, climate change, global warming, and loss of biodiversity), social challenges (including the problems of hunger, poverty, inequality, and exclusion), as well as governance challenges (e.g., gender differences, corruption). Although these goals were defined at the macro level – states and governments, companies are considered the main entities obliged to implement them (Montiel et al., 2021; Van Zanten & Van Tulder, 2021). Thus, ESG factors have become important in the assessment and analysis of economic activity (MacNeil & Esser, 2022).

The relation between profitability, financial stability, and commitment to ESG activities can be explained based on economic theories. In this context, three main theoretical approaches can help clarify the mechanisms linking financial development to stability and long-term performance. One of them is the resource theory, which posits that financial development promotes economic growth through more efficient resource allocation (Levin, 1997). Financial institutions play a key role in reducing transaction and information costs, monitoring costs, facilitating the flow of capital and investment, and increasing productivity and innovation. In sustainable development, financing environmental and social projects can support long-term growth. However, an excessive focus on short-term profits can lead to environmental degradation and the deepening of social inequalities, ultimately undermining sustainable development goals in the long term.

In contrast, market theory presents the opposite relation, suggesting that economic growth drives financial development. As the real economy grows, demand for financial services increases, which leads to the expansion of capital markets and financial institutions (Ang & McKibbin, 2007). The development of the green economy sector, which increases the demand for financing green projects, such as renewable energy or carbon credit markets, can be a good example. However, this theory also highlights risks associated with excessive financial market development, such as speculation or investment bubbles, which can compromise the financial system’s stability. Therefore, it is crucial for financial institutions and investors to take into account long-term sustainable development goals when promoting instruments, such as green bonds or impact investments.

Finally, Mitroff’s (1983) and Freeman’s (1984) stakeholder theory emphasize the importance of a wide range of entities that both influence and are influenced by a company’s functioning. According to this approach, enterprises do not operate in isolation from their environment, and their long-term success depends on their ability to consider the interests of various stakeholder groups – not only shareholders but also employees, customers, suppliers, local communities, and the natural environment.

Based on an in-depth literature review, we identified four leading trends and research areas related to ESG issues (Figure 1).

Figure 1. Main trends and areas of ESG research

The first area of research fully refers to the issues indicated in the previously mentioned report: “Who cares win”. They concern the essence of ESG and its impact on financial performance and long-term value of a company (Galbreath, 2013; Arvidsson & Dumay, 2022; De Giuli et al., 2023). In this approach, ESG is not only a synonym for ethical investing, but rather perceived as an integral part of the activity, investment strategy, which may affect effectiveness, efficiency, or stability of an economic entity. It is undoubtedly also a challenge, a contemporary process taking place in the companies’ environment, in addition to digitization and the use of advanced technologies (Łasak, 2023). This research direction also analyzes the issue of financing sustainable investments by the banking sector. Banking institutions play a crucial role in redirecting the flow of capital towards more sustainable investments. The implementation of sustainable development goals and activities resulting from the ESG concept is currently not only a possibility for banks, but has become an imperative for their activities. Research indicates that banking institutions in developed and developing countries have implemented and are gradually implementing the provisions included in the adopted ESG activities. Additionally, they are directing capital flows to green investments that meet the taxonomy criteria. Research in the banking sector also indicates that credit institutions offer financing for biodiversity and ecosystems, climate change, energy change, pollution, and waste management (Pyka & Nocoń, 2024).

The second research trend focuses on ESG analysis from a risk management perspective (De Giuli et al., 2023). Engagement in sustainable activities generates a new type of risk – the ESG risk, resulting from spectacular environmental, social, and corporate governance factors (PKO Bank Polski S.A., 2022). This is a relatively new type of risk, with a cross-sectional nature, that affects the identified traditional types of financial and non-financial risks to varying extents and through various transmission channels. Hence, it is indicated that ESG risk should be included in risk management systems. The increasing involvement of companies, including banking institutions, in the implementation of sustainable development goals increases their exposure to ESG risk (Marcinkowska, 2022; Chiaramonte et al., 2022; Liu et al., 2023; Zhang, 2023; Bolibok, 2024; Pyka & Nocoń, 2024). Research conducted for the banking sector indicates a growing awareness of the importance of ESG risk among banks, as reflected in practical activities related to bank risk management systems. Banks are increasingly aware of ESG risk and the need to incorporate it into their bank risk management processes, including the assessment of ESG risk exposure (Pyka & Nocoń, 2024).

The third research area focuses on the analysis of the ESG concept, which is often referred to as sustainable development, and is identified or conceptually combined with Corporate Social Responsibility (CSR) in many areas (Wood, 2015; Larcker et al., 2021; Gillan et al., 2021). ESG undoubtedly grew out of the sustainable development concept – a socio-economic doctrine of the second half of the 20th century, which originally assumed that the quality of life should correspond to a level allowed by the current state of civilization (Borkowski, 2001; Zakrzewska, 2019; Brundtland, 2004). ESG activities are therefore aimed at seeking solutions that, on the one hand, meet the needs of current generations, while on the other hand, do not hinder their implementation in the future (Borys & Czaja, 2009; Borys, 2012). In many studies, ESG is also compared to CSR, defining it as a subcategory of CSR that measures a company’s commitment to social responsibility (Hazen, 2021). In this approach, ESG is the modern equivalent of the previously well-known and implemented corporate social responsibility.

The fourth research trend posits that ESG represents the preferences or tastes of certain stakeholders (Serafeim, 2021). The growing importance of ESG can be attributed to the fact that economic entities face the challenge of adapting to the changing preferences of consumers and investors, who seek more sustainable products and services that reflect a shift away from the dogmas of the industrial era. It can also be considered as an effort to align business or investment activity with certain personal or collective values. Therefore, it expresses changing markets and societies (Kell, 2018). In this approach, ESG appears as a concept oriented to issues beyond purely financial aspects (Broadridge, 2021). For some, ESG is a marketing tool used by companies that often employ greenwashing, presenting themselves and their products or services as more ecological than they really are. Moreover, the literature review suggests that investors from countries with a clear liberal profile are willing to accept lower rates of return from investments consistent with ESG values, indicating ideological conditions for investment decisions. It is noted that the promotion of the ESG concept by international institutions is associated with a specific vision of the socio-economic order, based on values such as inclusiveness and climate protection, which can also be perceived as a manifestation of the “progressive agenda”. Others (mainly conservative circles) identify ESG with an ideological preference/tool – called “woke capitalism”, i.e. an attempt to impose specific social norms by corporations and asset managers (Sorkin et al., 2022; Rapoza, 2020; Polman, 2022; Blomqvist & Stradi, 2022). They also argue that current backlash against the use of ESG is a part of a larger conservative culture war against “woke” politics (Crews, 2023). Thus, ESG becomes not only a method of risk assessment but also a symbol of political and cultural division (Raghunandan & Rajgopal, 2022).

The impact of ESG on the performance and financial stability of banks

The growing importance of ESG has undoubtedly coincided with a renaissance in thinking about corporate goals, growing interest in implementing sustainable development assumptions and the so-called ‘stakeholder capitalism’, which has enriched the views and approaches to defining this concept (Pollman & Thompson, 2021; Sjåfjell & Bruner; 2020; Mayer, 2018; Edmans, 2020; Henderson, 2020; Serafeim, 2022; Sundheim & Starr, 2020; Bebchuk et al., 2023). In the UN Report in 2004, it was indicated that companies with better ratings or higher ESG assessments can increase shareholder value by better management of risk related to emerging ESG issues, anticipating regulatory changes or market trends, access to new markets and reducing costs, as well as improving brand and image (IFC, 2004). In the current trend of scientific research in ESG, one of the leading directions is to identify cause-and-effect relations between ESG activities and the financial results of economic entities (Friede et al., 2015; Saïdane & Abdallah, 2020). Initially, ESG was identified mainly with corporate social responsibility (CSR) when undertaking research in this area. The results of the first research works representing such an approach, which analyzed the impact of ESG activities on the financial performance of non-financial enterprises, were ambiguous (Naimy et al., 2021; Fatemi et al., 2018). On the one hand, the main reason for this was concerns about measurement and data limitations and, on the other hand, how they are reported (Li et al., 2017). However, El Ghoul et al. (2011) showed that adopting a sustainable policy has a positive impact on the cost of equity. A company that adopts social responsibility practices is characterized by lower risk and a higher market valuation. Albuquerue et al. (2012) noted that ESG is a strategic product that generates higher corporate profits. Moreover, sustainable activities reduce the systemic risk of a company and make its financial results less correlated with the economic cycle. In turn, Barth et al. (2015) proved that ESG activities and their reporting are positively related to a company’s value, analyzing two channels through which this relation can arise – the capital market channel and the real effects channel. They investigated this relation from the perspective of the impact of sustainable activities on a company’s liquidity, cost of capital, and expected future cash flows. Garcia et al. (2017) examined the relationship between a company’s financial profile and its environmental, social responsibility, and corporate governance activities, based on companies in BRICS countries from 2010 to 2012. They noted that companies from the so-called sensitive industries — those exposed to social and environmental damage and subject to political and moral pressure — achieve better ESG results. Hassan et al. (2021) also indicated that corporate engagement in sustainable activities mitigates market risk. Chilukuri (2023) provided empirical evidence indicating that companies that strongly engage in ESG activities tend to demonstrate better financial performance and lower risk exposure. Yavuz et al. (2025), analyzing the impact of ESG on the financial performance of companies in Turkey from 2011 to 2020, also confirmed that activities implemented as part of an ESG strategy have an impact on corporate financial performance. Siwiec and Karkowska (2024), examining this impact among companies from the Central and Eastern European (CEE) region from 2017 to 2021, showed a positive relationship between ESG disclosures and financial performance, as measured by the ROA indicator. Moreover, they noted that in the case of entities operating in the financial sector, this correlation is stronger than in companies operating in other industries.

However, Naimy et al. (2021), analyzing companies from the industrial sector in East Asia from 2011 to 2017, noticed that individual pillars E, S, and G have a different impact on financial results. They found a positive correlation between environmental and corporate governance activities, and a negative correlation between social responsibility and the financial results of companies. Moreover, they noticed that this impact also depends on the industry in which a company operates. In turn, Matuszewska-Pierzynka et al. (2023) found a statistically significant relationship between ESG results and dividend policy, using the example of non-financial companies included in the Global 500 in 2021. Błach et al. (2025), in line with this research trend, analyzed the impact of companies’ involvement in sustainable development on their financial results in the context of various features of corporate governance (in particular board attributes and ownership structure) in Poland. They confirmed a significant positive relationship between ESG activities and financial results, measured by ROA and MV/BV ratios, indicating that a company’s commitment to sustainable development improves its profitability and market value. They also observed a relation between gender diversity in corporate boards (the presence of women on the board of directors) and accounting performance.

The awareness of a need to integrate ESG aspects into financial strategies, processes, and instruments to generate value in the medium and long term is also growing in the banking industry. An increasing number of studies focus on analyzing the relationship between the implementation of ESG criteria and the performance and risks of banking institutions (Ahmed et al., 2018; Birindelli et al., 2018; Birindelli et al., 2019; Buallay, 2019; Miralles-Quirós et al., 2019a; Miralles-Quirós et al., 2019b; Shakil et al., 2019; Di Tommaso & Thornton, 2020; Paltrinieri et al., 2020). Azmi et al. (2021) studied the relationship between ESG and bank value in a research sample of 251 institutions from 44 emerging economies, spanning the period 2011-2017. They identified a non-linear relation between ESG activity and bank value. They noted that involvement in sustainable activities has a positive impact on the value of the analyzed institutions; however, it is noteworthy that economies of scale decrease with their increasing involvement in this area. In their opinion, the most important factors that have a positive impact on bank stability are environmental activities, including environmental transparency and emissions reduction. Similar studies were conducted by Chiaramonte et al. (2021), who analyzed the combined and separate impacts of environmental (E), social (S), and corporate governance (G) factors on bank stability. Based on a research sample of institutions operating in 21 European countries between 2005 and 2017, the study showed that the total commitment of institutions to sustainable activities reduces their fragility during periods of financial instability. The stabilizing effect is particularly visible in the case of banks with higher ESG ratings. At the same time, they supported regulatory actions aimed at implementing a requirement to disclose ESG information, as they proved that a longer reporting period yields greater benefits for a bank’s stability. Finally, they noted that the links between ESG activities and the stability of a banking institution vary significantly depending on the bank’s characteristics and the environment in which it operates. Buallay (2019), analyzing 235 banks from 2007 to 2016, found a significant positive impact of ESG on the financial performance of the analyzed institutions. However, she noted that in some areas, these results differ significantly. She indicated that:

• reporting information on the environment (E) has a positive impact on financial results (measured by ROE) and market results (measured by Tobin’s Q);
• disclosing information on social responsibility (S) has a negative impact on all analyzed indicators, i.e. ROA, ROE and Tobin’s Q;
• in turn, reporting information on corporate governance (G) has a negative impact on ROA and ROE.

However, while ESG activities in the banking sector are increasingly seen as essential tools for managing long-term risk and aligning capital allocation with sustainable development goals, banks, unlike manufacturing or energy companies, have limited direct environmental impact but exert massive indirect influence through their lending and investment portfolios. Compared to companies in other industries, such as tech firms, banks face stricter regulatory pressure to disclose their ESG performance, particularly under frameworks like the EU Taxonomy or the CSRD in Europe. Socially, banks are uniquely positioned to drive financial inclusion, especially by offering services to underserved or marginalized communities – a challenge that manifests differently than in industries like retail or telecommunications. In terms of governance, the complexity of financial instruments and fiduciary responsibilities creates heightened exposure to reputational and compliance risks, which often surpass governance demands faced by companies in less-regulated sectors (Wendt, 2015).

To summarize, sustainable development is becoming one of the key priorities in banks’ strategies, resulting from the growing awareness of the importance of environmental, social, and corporate governance in the financial sector. Our analysis is based on Mitroff’s (1983) and Freeman’s (1984) stakeholder theory, which explains the impact of sustainable activities on financial performance by emphasizing the importance of ethical organization management and taking into account the interests of various stakeholder groups. Stakeholder theory suggests that organizations that consider the needs of a wide range of stakeholders – including customers, local communities, investors, and regulators – can achieve long-term benefits, such as financial and reputational stability. However, the costs of implementing ESG strategies can negatively affect financial performance in the short term, raising questions about the real impact of these activities on banks’ profitability and stability.

Based on theoretical assumptions regarding the role of ESG in building banks’ sustainable value, the following research hypotheses were formulated in the study:

H1: Implementation of ESG activities positively impacts commercial banks’ profitability.

H2: Increasing banks’ involvement in ESG-related activities positively impacts their financial stability, as reflected by

a higher Z-score index.

METHODOLOGY

This analysis examines the impact of ESG strategies on the profitability and stability of commercial banks on an international scale. The study utilizes the most up-to-date banking data, incorporating ESG-related variables: Social, Governance, and Environment. These variables are defined according to the ESG scores methodology published by Refinitiv (Refinitiv, 2022). This source has been previously used in empirical research (Buallay, 2019; Caldeira dos Santos & Pereira, 2022; Galletta et al., 2022). Considering all three pillars, the ESG score provides a comprehensive assessment of a bank’s ESG performance. The study initially considered a sample of 1,730 commercial banks between 2012 and 2021, based on data from the Refinitiv Eikon database. However, due to data availability issues, particularly the lack of ESG ratings reported by many banks, the final sample used in the analysis was reduced to 384 banks from 62 countries worldwide. Nevertheless, the analysis period encompassed by the study extends over a minimum of six years, ensuring sufficient temporal coverage to capture medium-term trends and mitigate the influence of short-term fluctuations. These data limitations also contribute to variation in the number of observations across the model estimations. Using a panel regression methodology, the study empirically documents the significance of ESG strategies for bank profitability and stability. The analysis focuses on three dimensions of ESG performance: environmental score (Environment), social score (Social), and governance score (Governance). The assessment of the Environmental pillar is based on three key aspects: 1) Resource Use, which reflects the bank’s ability to reduce energy, water, and material consumption, as well as to find complementary and more eco-friendly solutions; 2) Emissions Reduction, which measures the company’s effectiveness and commitment to reducing environmental emissions; 3) Innovations, which reflect the bank’s ability to lower ecological costs through new technologies or eco-friendly projects. The Social pillar ranking considers four categories: 1) Workforce Score, which measures the bank’s effectiveness in ensuring a healthy and safe workplace, maintaining job satisfaction, and providing equal opportunities for its employees; 2) Human Rights, which refer to the company’s compliance with fundamental human rights conventions; 3) Community Score, which indicates the bank’s commitment to business ethics and public health; 4) Product Responsibility, which reflects the bank’s ability to offer high-quality services. Finally, the assessment of the Governance pillar combines the bank’s effectiveness in applying best corporate governance practices, ensuring equal treatment of shareholders, and integrating social responsibility strategies into its ongoing operations.

Although the Refinitiv Eikon database provides extensive ESG-related data for a large number of commercial banks, the dataset is not free from limitations. In particular, potential biases may arise from missing or unevenly reported ESG scores across banks, countries, and years. To address this, the analysis includes only banks with the largest possible number of observations having complete ESG and financial data for the examined period. This approach ensures consistency and comparability across observations.

Table 1 presents the distribution of the number of banks across the countries participating in this study. The sample distribution exhibits significant geographical diversity, enabling a comprehensive analysis of the impact of ESG strategies across diverse economic and social contexts. The highest number of banks originates from countries, such as the United States (67) and Japan (25), highlighting the dominance of large economies and developed financial markets in defining ESG activities within their banking sectors, while banks from developing countries, such as India (19) and the Philippines (18), are also significant. This heterogeneity in the research sample mitigates potential biases arising from over-concentration in specific regions, thereby improving the generalizability and validity of the GMM estimations.

Table 1. Geographical distribution and number of banks in the research sample

Country	# Banks	Percent	Country	# Banks	Percent
Argentina	3	0.8	Mauritius	2	0.5
Austria	3	0.8	Morocco	2	0.5
Bangladesh	2	0.5	Netherlands	1	0.3
Belgium	1	0.3	New Zealand	1	0.3
Brazil	5	1.3	Nigeria	7	1.8
Canada	9	2.3	Norway	15	3.9
Chile	4	1.0	Oman	4	1.0
China	13	3.4	Pakistan	1	0.3
Colombia	3	0.8	Papua New Guinea	1	0.3
Czech Republic	1	0.3	Peru	1	0.3
Denmark	3	0.8	Philippines	18	4.7
Egypt	5	1.3	Poland	9	2.3
Finland	1	0.3	Portugal	1	0.3
France	3	0.8	Puerto Rico	1	0.3
Germany	3	0.8	Qatar	5	1.3
Ghana	3	0.8	Russia	3	0.8
Greece	4	1.0	Rwanda	1	0.3
Hong Kong	3	0.8	Saudi Arabia	1	0.3
Hungary	2	0.5	Singapore	3	0.8
India	19	4.9	South Africa	5	1.3
Indonesia	14	3.6	Spain	5	1.3
Ireland	4	1.0	Sweden	3	0.8
Israel	4	1.0	Switzerland	5	1.3
Italy	7	1.8	Taiwan	9	2.3
Japan	25	6.5	Thailand	6	1.6
Jordan	1	0.3	Turkey	6	1.6
Kenya	8	2.1	Ukraine	1	0.3
Korea	6	1.6	United Arab Emirates	9	2.3
Kuwait	4	1.0	United Kingdom	8	2.1
Lebanon	3	0.8	United States	67	17.4
Malaysia	11	2.9	Vietnam	6	1.6
			Total banks:	384	100.0
			Total countries:	62

Source: Own elaboration based on Refinitiv Eikon data.

Figure 2 presents the average annual scores for the Social, Governance, and Environmental dimensions of banks over the period from 2012 to 2021. The Social score exhibits a clear upward trend, increasing steadily from around 43 in 2012 to approximately 60 in 2021. This suggests a growing emphasis by banks on social responsibility aspects, such as community engagement, employee relations, and customer welfare, over the analyzed decade. The Governance score begins at a higher baseline of approximately 52 in 2012 and maintains a relatively stable trajectory, with a slight increase, peaking around 58 in 2019 and then slightly declining thereafter. This indicates consistent attention to governance practices, including board effectiveness, transparency, and shareholder rights, which appear well-established and sustained throughout the period. In contrast, the Environmental score demonstrates more variability and generally lower values compared to Social and Governance scores. Starting near 47 in 2012, it declines around 2017-2018 to about 37, followed by a partial recovery reaching roughly 48 in 2021. This pattern may reflect fluctuating priorities or challenges related to environmental sustainability efforts within the banking sector, possibly due to evolving regulatory pressure or differing strategic objectives over time.

Figure 2. The average annual ESG rating of banks’ activities corresponding to the social, corporate governance and environmental pillars in a given year across the full sample. The data is based on aggregated ESG indicators available in the Refinitiv Eikon database.

Source: Own elaboration based on Refinitiv Eikon data.

To verify the impact of ESG activities on bank performance and stability, we employed three key financial indicators: Return on Assets (ROA), Return on Equity (ROE), and the Z-score. ROA and ROE are widely recognized in the literature as standard measures of bank profitability, reflecting the institution’s ability to generate earnings from its assets and equity base, respectively. ROA is calculated as net income divided by total assets, indicating how efficiently a bank uses its assets to generate profit. ROE, in turn, is calculated as net income divided by shareholders’ equity, measuring the return generated on the capital provided by shareholders. These indicators provide a clear and comparable view of how efficiently a bank transforms its resources into financial returns. On the other hand, financial stability is assessed using the Z-score, a well-established proxy for insolvency risk in banking studies. The Z-score combines profitability, leverage, and return volatility into a single metric, capturing a bank’s capacity to absorb financial shocks without becoming insolvent. A higher Z-score indicates greater stability and a lower probability of default. While these indicators may appear self-evident to those familiar with the field, their selection was based on both their frequent use in empirical studies on ESG and financial performance (e.g., Buallay, 2019) and their relevance to the research objectives. ROA and ROE capture short-term performance outcomes, while the Z-score adds a longer-term dimension by incorporating risk and volatility.

The Z-score is calculated by applying the formula:

where:

Z-scoren,t – the Z-score was calculated for each bank n over time t. Specifically, CAR represents the bank’s capital adequacy ratio. At the same time, ROA and σROA denote the estimated expected value and standard deviation of each bank’s return on assets over the full period, respectively (Lepetit & Strobel, 2013). The Z-score reflects the number of standard deviations by which ROA would need to decline from its expected value before the bank’s capital is depleted, signaling risk of insolvency. In simple terms, it acts like a financial “shock absorber,” the higher the Z-score, the greater the bank’s stability, indicating a lower probability of insolvency. Just as a well-cushioned car suspension can handle bumps on the road more smoothly, a high Z-score suggests that a bank can better withstand financial shocks.

Control and macroeconomic variables are incorporated into the model to ensure a more accurate estimation of the relationship between ESG performance and bank outcomes, accounting for factors that influence profitability and stability. The debt-to-assets ratio reflects a bank’s leverage and overall financial risk. Higher leverage can increase vulnerability to shocks and reduce stability. The loan-to-assets ratio captures the extent of credit exposure, which directly affects income generation but also introduces credit risk, depending on loan quality. These financial ratios are standard controls in banking literature, as they are key determinants of performance and resilience. To account for country-specific economic conditions, the model also includes GDP growth, which influences banks’ operating environments, affecting loan demand, investment activity, and risk exposure. By controlling for these factors, the model aims to isolate the unique contribution of ESG-related practices to financial outcomes.

A two-step GMM estimator (Blundell & Bond, 1998) was used to test the research questions. It is particularly useful for analyzing dynamic panels with a short study period and many observations. Its advantage lies in accounting for the dynamic nature of banks’ decisions, such as operational strategies affecting income. Additionally, the method effectively addresses potential endogeneity issues using internal instruments, enhancing the robustness and credibility of the estimated relationships between ESG activities and financial outcomes. The model also uses lagged explanatory variables as instruments, which helps reduce the problem of endogeneity. The two-step GMM estimator is more efficient than one-step estimators as it mitigates biases arising from heteroskedasticity and autocorrelation in the residuals (Roodman, 2009). However, the GMM estimator also has certain limitations. One of its limitations is its sensitivity to the quality of the selected instruments; an excessive number of instruments can weaken diagnostic tests, such as Hansen’s test, making it more challenging to verify the correctness of the model specification. Additionally, caution is required when interpreting the results, as the model accounts only for linear relationships between variables and may overlook nonlinear effects, which could also be relevant in ESG-related decisions and a bank’s financial stability.

The general form of the model is expressed by the equation (2):

where:

Y represents the bank stability indicators [ROA, ROE, Z-score] as dependent variables, where ROA denotes the return on assets for each n bank from i country in t year, ROE represents the return on equity, and Z-score serves as an indicator of bank insolvency risk. The model incorporates the ESG variable vector, ESG = [esg_score, social, governance, envir], which corresponds to the bank’s sustainable policy in the following dimensions: overall ESG approach, social responsibility, corporate governance, and environmental impact. Additionally, control variables characterizing the bank were included, defined as Bank_Control = [debt/ta, loan/ta], where debt/ta represents the bank’s debt-to-assets ratio, and loan/ta reflects the share of loans in the bank’s total assets. The variable GDPgrowth, included in the model as a macroeconomic control, captures the annual change in a country’s GDP, reflecting the pace of its economic expansion or contraction. Finally, the error term . Table 2 presents a detailed overview of the variables used in the empirical analysis, including their definitions, calculation methods, classification, and the expected direction of their impact on bank profitability and financial stability.

Table 2. Description of variables used in the empirical analysis

Variable	Description / Calculation	Type	Expected Effect
ROA	Return on Assets = Net Income / Total Assets	Dependent variable	Measures bank profitability
ROE	Return on Equity = Net Income / Equity	Dependent variable	Measures bank profitability
Z-score	(ROA + Equity/Assets) / Standard deviation of ROA	Dependent variable	Indicates bank stability (higher value = lower insolvency risk)
ESG_Score	Overall ESG score provided by Refinitiv Eikon	Main independent variable	Captures total ESG engagement; expected positive or mixed effect
Social	ESG sub-score: social responsibility (workforce, human rights, community, product responsibility)	Independent variable	Expected positive impact on stability and stakeholder trust
Governance	ESG sub-score: governance quality (transparency, board structure, shareholder rights)	Independent variable	Expected positive impact on both profitability and stability
Environmental	ESG sub-score: environmental practices (emissions reduction, resource use, innovation)	Independent variable	Potential short-term negative effect on profitability due to high costs
Debt/TA	Debt-to-Assets Ratio = Total Debt / Total Assets	Control variable	Higher leverage may negatively affect stability
Loan/TA	Loan-to-Assets Ratio = Total Loans / Total Assets	Control variable	Reflects credit risk exposure; may impact performance depending on loan quality
GDPgrowth	Country’s annual growth of GDP	Macro variable	Year-over-year change in the total economic output of a country, indicating the pace of its economic expansion or contraction

Diagnostic tests were conducted to assess key model assumptions. Hansen’s test (Hansen, 1982) was used to evaluate the validity of the instrument set and the presence of over-identifying restrictions. The Arellano-Bond tests (1991) for first-order (AR(1)) and second-order (AR(2)) serial correlation in the residuals were applied to detect autocorrelation patterns. Specifically, these tests examined whether the model’s error terms exhibited serial correlation at lag 1 and lag 2. The null hypothesis in the Arellano-Bond tests assumes no autocorrelation; therefore, failure to reject the null hypothesis indicates that residuals are not serially correlated, supporting the model’s specification.

Descriptive statistics of the variables used in the model are presented in Table 3. The ESG score statistic shows a mean value of 50.14 and a standard deviation of 20.95, indicating that, on average, the analyzed banks met the ESG requirements. The highest compliance is observed in the area of corporate governance (54.49 ), followed by sustainable social activities (50.89 ), while the lowest adherence is related to environmental efforts (45.72 ). On the other hand, during the analyzed period, the average value of the ROA indicator was 1 , ROE stood at 11 , and the Z-score was at the level of 51.17. The Z-score, which measures the financial stability of banks by combining profitability, capitalization, and volatility indicators, shows substantial variability, with a standard deviation of 47.44 and a range extending from -62.42 to 572.10. A higher Z-score value indicates greater financial stability and lower risk of insolvency. Conversely, negative Z-score values suggest that some banks experienced financial distress or were close to insolvency during the period under study. The positive skewness (3.93) further indicates that while most banks maintain moderate to high financial stability, a few outliers with very high Z-score values heavily influence the distribution. This variability underscores the heterogeneous financial health status among the sampled banks throughout the analyzed timeframe.

Table 3. Descriptive statistics for the research sample

	Obs	Mean	Median	Std.Dev.	Min	Max	Skew
esg_score	2870	50.14	49.99	20.95	1.57	94.78	-0.07
social	2870	50.89	51.00	24.44	0.63	97.62	-0.12
governance	2870	54.49	56.34	22.34	0.47	99.38	-0.24
envir	2870	45.72	47.27	30.00	0.00	97.47	0.06
roa	3840	0.01	0.01	0.01	-0.12	0.23	3.59
roe	3840	0.11	0.10	0.12	-5.74	0.91	-24.62
z-score	3840	51.17	39.24	47.44	-62.42	572.10	3.93
debt/ta	2820	0.11	0.06	0.20	0.00	11.12	25.55
loan/ta	3840	0.62	0.64	0.16	-0.03	2.00	-0.44
GDPgrowth	3840	2.80	2.90	4.09	-25.91	25.18	-1.00

Notes: Descriptive statistics were performed on a sample of 384 banks worldwide over the period 2012–2021.

Source: Own study based on Refinitiv Eikon data.

To gain deeper insight into the relationships among the variables, a correlation analysis was performed, and the results are summarized in Table 4. The analysis reveals that ROA exhibits a weak but statistically significant negative correlation with the overall ESG score (-0.09), as well as with the social (-0.06) and environmental (-0.17) dimensions. Similarly, ROE shows very weak negative correlations with ESG (-0.03), social (-0.03), and environmental (-0.01) factors. Financial stability, as measured by the Z-score, demonstrates a weak positive correlation with the overall ESG score (0.15) and the social dimension (0.19), while the environmental dimension is weakly negatively correlated with the Z-score (-0.20). Control variables such as loan-to-asset ratio correlate weakly and positively with ROA (0.11) and Z-score (0.09), whereas debt-to-asset ratio correlates weakly and negatively with Z-score (-0.21) and ROA (-0.04).

Table 4. Correlation matrix

	roa	roe	z-score	esg_score	social	governance	envir	loan_ta	debt_ta	GDPgrowth
roa	1.00
roe	0.64***	1.00
z-score	0.01	0.01	1.00
esg_score	-0.09***	-0.03*	0.15***	1.00
social	-0.06**	-0.03*	0.19***	0.93***	1.00
governance	-0.04	0.04*	-0.02	0.73***	0.45***	1.00
envir	-0.17***	-0.01*	-0.20***	0.78***	0.73***	0.38***	1.00
loan_ta	0.11***	0.01	0.09***	0.03	0.08***	-0.04	-0.02	1.00
debt_ta	-0.04*	0.02	-0.21***	0.10***	0.09***	0.06**	0.09***	0.06*	1.00
GDPgrowth	0.11***	0.17***	0.02*	-0.03	-0.01	-0.02	-0.01	0.06**	0.05	1.00

Note: P-values * p < 0.05, ** p < 0.01, *** p < 0.001

Source: Own study based on Refinitiv Eikon data.

RESULTS AND DISCUSSION

The analysis was conducted based on a prior empirical study of the banking sector across 44 emerging market countries from 2011 to 2017 (Azmi et al., 2021) and a sample of 20 banks in Pakistan from 2008 to 2017 (Ramzan et al., 2021). The subsequent Tables 5–7 present the average results of the panel regression estimation, examining the impact of ESG activities on the profitability and stability of commercial banks (specifically, Table 5 for the ROA variable, Table 6 for ROE, and Table 7 for Z-score). The estimation was conducted based on the formulated research hypotheses: H1, assuming a positive impact of ESG activities on bank profitability, and H2, assuming a positive effect of increasing ESG engagement on the financial stability of banks. To examine these relationships, each table separately verifies the impact of ESG activities measured by the overall index (Model 1) as well as its components: social (Model 2), governance (Model 3), and environmental (Model 4). This division enables a detailed analysis of the ESG aspects that are most crucial for banks’ profitability and financial stability.

The estimation results (Tables 5 and 6) indicate that overall ESG performance, as well as its social dimension, is negatively and significantly associated with both ROA and ROE, suggesting a consistent adverse relationship between ESG engagement and banks’ profitability. In addition, the governance dimension shows a negative and significant effect on ROA, while its impact on ROE is statistically insignificant. The environmental dimension does not exhibit a significant influence on either profitability measure. These findings do not support Hypothesis H1, which posits that the implementation of ESG activities positively impacts commercial banks’ profitability. On the contrary, the results suggest that, in the short to medium term, ESG-related initiatives, particularly those within the social and governance domains, may involve financial outlays or resource reallocations that reduce banks’ immediate profitability, as reflected in both asset- and equity-based returns. Several factors may explain this negative relationship. First, implementing ESG activities often entails additional operational costs, such as investments in green technologies, regulatory compliance, and social engagement. These expenditures may reduce bank profits in the short term. Second, banks prioritising ESG may adopt more conservative lending practices, limiting financing to high-carbon industries, which could also affect their revenue. It is important to note that these results are specific to the analyzed period and may not necessarily reflect long-term trends. Over a longer horizon, increased environmental and social responsibility could enhance banks’ reputations, attract investors, and mitigate regulatory risks, potentially leading to higher profitability.

Similar results were obtained by Cornett et al. (2016), who indicated that increased commitment to sustainable development may pose a short-term burden on bank profitability. Likewise, Goss and Roberts (2011) observed that banks with high ESG activities incur higher operational costs, which negatively affect their financial performance. The findings also show that environmental activities do not drive bank performance (-0.001). This result can be explained by the potentially higher costs of implementing ESG initiatives, which may weigh on banks’ current financial performance. These costs may stem from the need to invest in more sustainable initiatives or to adapt operations to regulatory requirements, which in the short term leads to lower profitability indicators. Furthermore, the negative relationship concerning environmental activities may be linked to their long-term nature. The benefits of such initiatives are often not visible in the short run, as confirmed by Scholtens (2008). The author emphasized that investments in environmentally friendly actions generate value only over a longer horizon when both initial costs and regulatory effects begin to amortize. Therefore, in light of the obtained results, the proposed hypothesis H1, stating that the implementation of ESG activities positively affects the profitability of commercial banks, cannot be positively verified. The analysis demonstrated that the relationship between ESG activities and profitability is negative, implying that increased engagement in environmental, social, and corporate governance aspects may be associated with lower profitability indicators in the analyzed banks.

Table 5. Estimation results of models verifying the impact of ESG on the ROA ratio of the full sample of commercial banks in the 10 years of 2012–2021

	(1)	(2)	(3)	(4)
	esc_all	social	gover	envir
L(-1) roa	0.698***	0.724***	0.698***	0.660***
	(0.062)	(0.060)	(0.063)	(0.070)
esg_score	-0.011*
	(0.001)
social		-0.001*
		(0.001)
governance			-0.001*
			(0.001)
envir				-0.000
				(0.000)
loan_ta	0.103***	0.068***	0.018	0.059***
	(0.005)	(0.004)	(0.006)	(0.003)
debt_ta	-0.004**	-0.006*	-0.003**	-0.003**
	(0.007)	(0.007)	(0.006)	(0.006)
GDPgrowth	0.000***	0.001***	0.000***	0.000***
	(0.000)	(0.000)	(0.000)	(0.000)
Observations	1146	1146	1146	1146
Number of groups	191	191	191	191
Number of instruments	17	17	17	17
Hansen statistic	32.61	33.18	35.08	31.61
p value of Hansen statistic	0.112	0.100	0.1673	0.137
AR(1)	-2.293	-2.287	-2.243	-2.065
p-value	0.0218	0.0222	0.0249	0.0389
AR(2)	1.372	1.347	1.361	1.546
p-value	0.170	0.178	0.173	0.122

Note: The model is presented using equation (2). The models were estimated using the GMM estimator. The standard error is provided in parentheses. The p-value indicates significance at the respective level * p<0,1, ** p<0,05, *** p<0,01. AR(1) and AR(2) AR(1) and AR(2) represent the empirical values of the Arellano-Bond test for first- and second-order autocorrelation, respectively, for the null hypothesis H0: There is no first-order (second-order) autocorrelation is present. Regarding the variation in the number of observations across the models, this is due to missing data in specific ESG subcomponents, which slightly reduced the sample and the number of groups. Nevertheless, the analysis period encompassed by the study extends over a minimum of six years, ensuring sufficient temporal coverage to capture medium-term trends and mitigate the influence of short-term fluctuations.
Source: Own study based on Refinitiv Eikon data.

The applied control variables, namely loan_ta (the share of loans in total assets) and debt_ta (the share of debt in total assets), also deserve attention due to their significance in shaping bank profitability. The loan_ta coefficient is positive and statistically significant, indicating that increasing the share of loans in a bank’s assets leads to higher profitability. This result suggests that lending activities positively impact bank profitability, which aligns with expectations, given that loans represent one of the primary sources of banks’ interest income. In contrast, the debt_ta variable has a negative coefficient for ROA, meaning that a higher share of debt in a bank’s assets leads to a decline in profitability, and is not significant for ROE. This finding implies that an elevated level of debt may burden banks with higher financing costs, negatively affecting their profitability. Both results highlight the importance of effective asset and liability management in banks to enhance their financial performance. The results for the macroeconomic control variable indicate that GDP growth is positively and significantly related to both ROA and ROE, implying that favorable economic conditions enhance banks’ profitability regardless of their ESG engagement. This reinforces the notion that broader economic cycles play a substantial role in shaping banks’ financial performance.

The results presented in Table 7 provide partial support for Hypothesis H2, which posits that increasing banks’ involvement in ESG-related activities positively impacts their financial stability, as measured by the Z-score index. Specifically, the overall ESG score and the social dimension exhibit a positive and statistically significant relationship with the Z-score, indicating that greater ESG engagement in these areas is associated with higher financial stability. The coefficient of 0.286 for the overall ESG score suggests that a one-unit increase is associated with a statistically significant (10 level) rise of about 0.286 in the Z-score, reflecting improved financial stability in banks. These findings align with the research of Scholtens (2009), which demonstrated that financial institutions’ social engagement enhances their reputation, customer trust, and loyalty, ultimately strengthening financial performance stability. However, the governance dimension shows a negative but statistically insignificant effect, while the environmental dimension has a statistically significant negative impact on the Z-score. Research conducted by Hong and Kacperczyk (2009) also indicated that implementing pro-environmental strategies in the financial sector may face investment and regulatory barriers, affecting their effectiveness in the short term. These mixed findings suggest that while social aspects of ESG may enhance banks’ resilience, certain components, particularly environmental and governance factors, might be linked to reduced financial stability in the short to medium term. This observation is supported by the study of Boda and Karaś (2023), who analyzed 64 banks from 20 European countries between 2010 and 2021 and identified a nonlinear relationship between the ESG score and selected financial stability indicators. Their analysis demonstrated that the integration of ESG factors into banking operations can contribute to improved financial stability. Similar conclusions emerge from the study by Bax et al. (2021), who examined the relationship between ESG ratings and corporate risk, finding that ESG factors can influence corporate risk, which is essential for financial institutions.

One possible explanation for this pattern is that social initiatives, such as community engagement or employee welfare, may strengthen banks’ reputations and stakeholder trust, thereby contributing to greater stability. Conversely, environmental activities might require substantial upfront investments or expose banks to transition risks related to shifting regulatory frameworks and market dynamics, which could temporarily undermine financial stability. The negative, albeit insignificant, effect of governance could reflect costs or disruptions associated with internal restructuring or compliance efforts. These nuances highlight that the impact of ESG on financial stability is multifaceted and depends on the specific dimension considered.

Additionally, macroeconomic conditions, as captured by GDP growth, make a positive and significant contribution to financial stability, reinforcing the importance of a favorable economic environment for bank soundness. The loan-to-asset ratio positively relates to the Z-score, indicating that higher lending activity may be associated with better stability. In contrast, a higher debt-to-asset ratio is linked to lower stability, highlighting the risks associated with leverage.

The potential implications of the study’s findings underscore the need for a well-planned and structured approach to implementing ESG initiatives in banks. The positive impact of social initiatives on financial stability suggests that financial institutions should prioritize investments in projects that support local community development, promote inclusivity, and improve the living conditions of customers and employees. These actions can enhance bank stability and strengthen its reputation and long-term relationships with stakeholders.

In contrast, the negative impact of environmental initiatives on stability underscores the need for careful management of costs associated with climate protection. Banks may explore innovative financial solutions, such as green bonds, to mitigate the short-term financial burden of environmental investments. The findings also suggest that regulatory policies supporting ecological transformations in the banking sector should consider their impact on long-term financial stability to enable a more sustainable implementation of ESG activities.

Table 6. Estimation results of models verifying the impact of ESG on the ROE ratio of the full sample of commercial banks in the 10 years of 2012–2021

	(1)	(2)	(3)	(4)
	esc_all	social	gover	envir
L(-1) roe	0.506***	0.505***	0.560***	0.540***
	(0.076)	(0.072)	(0.071)	(0.073)
esg_score	-0.013*
	(0.007)
social		-0.013**
		(0.006)
governance			0.001
			(0.008)
envir				-0.001
				(0.003)
loan_ta	0.113**	0.114***	0.027	0.041*
	(0.045)	(0.037)	(0.048)	(0.022)
debt_ta	0.079	0.073	0.054	0.055
	(0.060)	(0.062)	(0.053)	(0.059)
GDPgrowth	0.005***	0.005***	0.005***	0.005***
	(0.001)	(0.001)	(0.001)	(0.001)
Observations	1198	1198	1198	1198
Number of groups	198	198	198	198
Number of instruments	21	21	21	21
Hansen statistic	28	26.71	30.02	32.82
p value of Hansen statistic	0.260	0.318	0.184	0.108
AR(1)	-1.677	-1.678	-1.665	-1.515
p-value	0.0936	0.0933	0.0959	0.013
AR(2)	1.011	0.962	0.985	1.080
p-value	0.312	0.336	0.325	0.280

Note: The model is presented using equation (2). The models were estimated using the GMM estimator. The standard error is provided in parentheses. The p-value indicates significance at the respective level * p<0,1, ** p<0,05, *** p<0,01. AR(1) and AR(2) AR(1) and AR(2) represent the empirical values of the Arellano-Bond test for first- and second-order autocorrelation, respectively, for the null hypothesis H0: There is no first-order (second-order) autocorrelation is present. Regarding the variation in the number of observations across the models, this is due to missing data in specific ESG subcomponents, which slightly reduced the sample and the number of groups. Nevertheless, the analysis period encompassed by the study extends over a minimum of six years, ensuring sufficient temporal coverage to capture medium-term trends and mitigate the influence of short-term fluctuations.
Source: Own study based on Refinitiv Eikon data.

Table 7. Estimation results of models verifying the impact of ESG on the Z-score ratio of the full sample of commercial banks in the 10 years of 2012–2021

	(1)	(2)	(3)	(4)
	esc_all	social	gover	envir
L(-1) z-score	0.686***	0.681***	0.652***	0.623***
	(0.102)	(0.105)	(0.100)	(0.089)
esg_score	0.286*
	(0.745)
social		0.011*
		(0.624)
governance			-0.612
			(0.912)
envir				-0.703**
				(0.348)
loan_ta	24.919***	23.758***	28.743***	21.960***
	(7.854)	(7.591)	(9.385)	(7.785)
debt_ta	-37.460**	-38.733**	-39.224**	-33.448**
	(16.036)	(16.210)	(16.801)	(15.466)
GDPgrowth	0.165***	0.171***	0.152***	0.195***
	(0.034)	(0.034)	(0.036)	(0.038)
Observations	1134	1134	1134	1134
Number of groups	189	189	189	189
Number of instruments	17	17	17	17
Hansen statistic	29.99	30.47	29.39	28.67
p value of Hansen statistic	0.185	0.170	0.206	0.233
AR(1)	-4.376	-4.387	-4.284	-3.831
p-value	1.21e-05	1.15e-05	1.84e-05	0.000
AR(2)	0.631	0.677	0.523	-0.116
p-value	0.528	0.498	0.601	0.908

Note: The model is presented using equation (2). The models were estimated using the GMM estimator. The standard error is provided in parentheses. The p-value indicates significance at the respective level * p<0,1, ** p<0,05, *** p<0,01. AR(1) and AR(2) AR(1) and AR(2) represent the empirical values of the Arellano-Bond test for first- and second-order autocorrelation, respectively, for the null hypothesis H0: There is no first-order (second-order) autocorrelation is present. Regarding the variation in the number of observations across the models, this is due to missing data in specific ESG subcomponents, which slightly reduced the sample and the number of groups. Nevertheless, the analysis period encompassed by the study extends over a minimum of six years, ensuring sufficient temporal coverage to capture medium-term trends and mitigate the influence of short-term fluctuations.
Source: Own study based on Refinitiv Eikon data.

CONCLUSION

Our research primarily focused on assessing the effects of implementing ESG activities in the banking sector. Therefore, the scope of the study was narrowed to the operational activities of banks, where the fundamental outcome of financial capital allocation remains a continuous increase in profitability. However, due to various factors, notably the 2007–2009 financial crisis and the COVID-19 pandemic, business strategies in credit institutions differ significantly from those of non-financial enterprises. These strategies require banks to secure the risks from their asset portfolios with bank capital to enhance financial stability. The absence of such security exposes banks to the risk of losing financial liquidity, which may lead to insolvency and bankruptcy. Nonetheless, the primary reason for developing bank risk management systems is to ensure the solvency of bank deposits. Banks play a crucial role in accumulating savings in every country. Disruptions in the mechanism of bank capital allocation, for this reason, threaten not only the financial security of credit institutions but also the stability of global financial systems.

The effects of the global financial crisis 2007–2009 expanded the scope of regulatory discipline in banking operations at both the microprudential and macroprudential levels. In contrast, the COVID-19 pandemic led to a global economic downturn, a depreciation of national currencies, and the implementation of anti-inflationary monetary policies. Under these circumstances, the pace of implementation of ESG activity increased significantly. In European Union member states that were particularly affected by the energy crisis, ESG activities came to be recognized as a source of technological and technical innovation, ultimately contributing to a new level of economic growth for EU countries and their role in the global economy. In a short period, the intensification of ESG activity implementation stimulated discussions on the practical aspects of sustainable development, particularly concerning its realisation conditions, sources, and costs. Banks proactively engaged in the process of green financing for the economy by integrating ESG strategies into their banking business management processes. The high ESG risk associated with credit institutions in the process of green funding for economic entities has been incorporated into their management systems, following the view that implementing better governance structures in the banking sector should reduce business risk and contribute to increasing shareholder value (Bătae et al., 2020). Therefore, this study aims to examine the significance of ESG practices in financial institutions concerning commercial banks’ profitability and financial stability on a global scale.

Using a dataset from the Refinitiv Eikon database, which covers 384 commercial banks from 62 countries between 2012 and 2021, and applying panel regression methodology, the empirical relevance of ESG activities for bank profitability and financial stability has been documented. The analysis focused on three dimensions of ESG performance: environmental (E), social (S), and governance (G) scores. The estimation of the collected research data indicates that ESG activities have a low but statistically significant impact on bank profitability, measured by ROA and ROE indicators. This negative relationship suggests that higher engagement in ESG-related practices is associated with a reduction in short-term bank performance. The results primarily reflect aggregated ESG scores and their social, environmental, and governance pillars, without direct examination of specific ESG initiatives or projects. The study also revealed that engagement in ESG activities, particularly within the social dimension, is positively associated with financial stability and the growth of the capital base of the analyzed banks. Meanwhile, the environmental pillar showed a negative relationship with both profitability and stability metrics, though the underlying causes of this effect cannot be conclusively determined from the aggregated data alone. From a policy perspective, these findings indicate that while ESG integration may involve trade-offs in the short term, further research using more granular ESG subcomponent data is necessary to clarify the specific mechanisms through which different types of ESG activities influence bank performance. Previous studies, such as Aevoae et al. (2022), also emphasize the complexity of ESG integration and its potential impacts on banks’ systemic risk, highlighting the importance of continued multidimensional investigation.

Interesting conclusions also emerge from the analysis of the impact of banks’ ESG activities on their financial stability. The study found a positive association between engagement in the social and governance dimensions and higher Z-score values, indicating greater financial stability. These results underscore the potential role of responsible social practices and governance structures in enhancing trust and supporting the long-term financial resilience of banking institutions. However, it is important to note that the aggregated nature of the ESG data limits the ability to pinpoint which specific activities drive these outcomes. Moreover, the effectiveness of ESG initiatives likely depends on their implementation details, as well as prevailing regulatory and market environments. Banks that strategically integrate ESG considerations into their operations may improve their stability and potentially strengthen their competitive position over time. Conversely, a negative relationship was observed for the environmental dimension, suggesting that, on aggregate, greater environmental engagement is associated with lower financial stability in the short term. This finding suggests potential challenges associated with environmental efforts, but further investigation with more granular data is required to better understand the underlying factors.

The study did not provide clear guidelines on which ESG actions are the most effective for commercial banks. However, it showed that intensifying the implementation of ESG activities in banks does not bring measurable short-term benefits. Nevertheless, implementing ESG actions may generate secondary benefits, such as improving the quality of life in society or increasing the attractiveness of foreign direct investments. The results of the study are, therefore, original. Firstly, because they differentiate the evaluation system for implementing ESG activities in banks. Secondly, they assess the impact of ESG actions on two groups of parameters that are most crucial for banking business operations. Thirdly, they explore a relatively under-researched area, paving the way for further studies and discussions. Since geopolitical factors, including the varying approval of ESG implementation in economic entities, are reshaping its existing vision, similar studies require further in-depth analysis. Assessing the impact of ESG activities on banks’ profitability and financial stability is just one of the key research areas. In green finance, studies identifying the effects of ESG strategy implementation in enterprises are equally important. Banks seem to respond differently when financing small and large green investment projects. Examining the impact of ESG on the banking sector also requires an assessment of systemic risk. Credit institutions are subject to macroprudential regulations that mitigate this risk with bank capital. This situation may alter banks’ approach to green financing as systemic risk increases. Ultimately, however, ESG research demands a thorough theoretical debate. The global economy continues to grow, regardless of post-crisis concepts aimed at slowing it down. Meanwhile, sustainable development represents a new dimension of life in wealthy economies. Numerous critical issues remain unanswered within this research field. ESG activities were expected to address many of them. However, they have now been suspended in a state of political limbo, which will result in high financial and opportunity costs for both financial and non-financial businesses in the context of financing green investments.

However, this study has limitations, which should be acknowledged and may guide future research. First, the use of aggregated ESG scores from the Refinitiv Eikon database limits the ability to assess the quality or depth of individual ESG initiatives reported by banks. These scores are based on disclosed information, which may vary in consistency, completeness, and actual implementation across institutions and countries. Second, the study focuses solely on commercial banks, excluding other financial institutions whose ESG engagement and financial dynamics may differ. Third, while the panel regression method allows for robust estimation, it does not fully capture potential endogeneity or reverse causality between ESG activities and financial performance. Finally, the research relies on quantitative measures and does not incorporate qualitative insights that might help explain why certain ESG activities may not translate into profitability gains.

Addressing these limitations in future studies, such as incorporating case-based analysis, alternative data sources, or differentiating between ESG activities with short-term and long-term effects, could provide a more nuanced understanding of the link between ESG engagement and bank performance.

Acknowledgment

The study is a part of Renata Karkowska’s research internship at the University of Economics in Katowice.

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Biographical notes

Irena Pyka is a Full Professor at the University of Economics in Katowice in the Department of Banking and Financial Markets. Her research interests focus on the problems of the functioning of the financial sector, particularly the banking system. Her publications cover a wide range of financial issues, including the unconventional monetary policy instruments of central banks, their effects on the banking sector and financial markets, central banks’ responsibility for financial stability, and the impact of the new regulatory framework on the financing of the economy through bank credit. Currently, she conducts scientific research related to the green financing of economic entities.

Renata Karkowska, Ph.D., is an Associate Professor at the University of Warsaw, Faculty of Management. Her research activities encompass areas such as capital markets, banking, systemic risk, and portfolio management. She is the author of about 100 scientific publications, including papers, chapters, and monographs. Currently, she is a lecturer in bachelor’s, master’s, and Ph.D. courses. For many years, she has served as a CFA mentor at the University of Warsaw and as a member of the editorial and reviewer boards. She worked with practitioners and experts in the capital market and banking sector.

Aleksandra Nocoń, Ph.D., is an Assistant Professor at the University of Economics in Katowice, Faculty of Finance, Department of Banking and Financial Markets. Her scientific interests and research concentrate mainly on central banking and monetary policy, as well as commercial banking and financial markets. She is very active in her scientific activity, publishing in both Polish and foreign monographs and high-quality scientific journals. She is an author of over 110 scientific publications and monographs. She participated in many international conferences and scientific activities. Her activity has been awarded the Medal of the National Education Commission, the Bronze Medal for Long Service, the Scholarship of the Minister of Science and Higher Education for Outstanding Young Scientists, the InterStar award of the University of Economics in Katowice for her contribution to the University’s internationalization of the university, numerous awards of the Rector of the University of Economics in Katowice and Rector’s scientific grants.

Authorship contribution statement

Irena Pyka: Conceptualization, Supervision. Renata Karkowska: Conceptualization, Data Curation, Formal Analysis, Methodology, Software, Writing – Original Draft Preparation. Aleksandra Nocoń: Conceptualization, Literature Review, Writing – Original Draft Preparation, Editing.

Conflicts of interest

The authors declare no conflict of interest.

Citation (APA Style)

Pyka, I., Karkowska, R., Nocoń, A. (2025). ESG activities and their influence on commercial banks’ profitability and financial stability. Journal of Entrepreneurship, Management and Innovation, 21(4), 54-75. https://doi.org/10.7341/20252143

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Received 1 March 2025; Revised 10 July 2025, 19 August 2025; Accepted 10 September 2025.

This is an open-access paper under the CC BY license (https://creativecommons.org/licenses/by/4.0/legalcode).