The effect of adopting Sustainable Development Goals on the financial performance of Islamic and conventional banks

Purpose This paper aims to comprehensively compare how Sustainable Development Goal (SDG) adoption affects Islamic and conventional banks’ financial performance. Design/methodology/approach The study uses an ESE index to measure the SDGs. The ordinary least square regression and two-step system GMM techniques are used extensively to analyze the panel data, which is analyzed using Stata software. The annual reports of Islamic and conventional banks are used to collect data. Findings The findings reveal that SDGs adoption is positively and significantly related to the financial performance of Islamic banks while negatively to conventional banks. This distinction results from Islamic finance’s innate moral and social tenets that are compatible with sustainability objectives. The findings significantly add to our understanding of the financial dynamics of Islamic and conventional banking and the conversation about the financial institutions’ role in promoting sustainable development. These findings have ramifications that provide stakeholders, financial institutions and legislators with a foundation upon which to think when incorporating sustainable practices into banking processes. Originality/value This research first measures and then compares the impact of SDGs on the returns of Islamic and conventional banks. The ESE index is generated to capture the variations of the sustainability performance of Islamic and conventional banks.