The effect of ESG scores on bank stability: Islamic vs. conventional banks

Sendi, Asaad ORCID: https://orcid.org/0000-0003-3656-365X, Banna, Hasanul ORCID: https://orcid.org/0000-0002-6902-8525, Hassan, M Kabir ORCID: https://orcid.org/0000-0001-6274-3545 and Huq, Tahsin Imtiazul ORCID: https://orcid.org/0000-0002-2326-5699 (2024) The effect of ESG scores on bank stability: Islamic vs. conventional banks. Journal of Sustainable Finance and Investment. pp. 1-31. ISSN 2043-0795

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Abstract

This paper examines the impact of ESG (Environmental, Social, and Governance) factors on the stability of banks across different continents, focusing on both conventional and Islamic banking institutions. The empirical analysis indicates a positive influence of ESG activities on the stability of these financial institutions. Notably, the study finds that ESG scores significantly enhance the stability of both conventional and Islamic banks. The environmental pillar score, especially within the conventional banking sector, shows highly positive and statistically significant results, highlighting the benefits of environmentally responsible practices. In contrast, the social pillar is positively correlated with stability in the Islamic banking sector, suggesting that active involvement in community service and social responsibility initiatives leads to improved stability. Overall, the study emphasizes the transformative potential of ESG activities in enhancing the stability and valuation of banks by positively influencing both their external perception and internal operations.