Does <scp>ESG</scp> Influence Bank Profitability? A Comparison Between Islamic and Conventional Banks

ABSTRACT This research investigates the impact of environmental, social, and governance (ESG) factors on the performance of 67 banks across 13 countries, with a specific focus on comparing Islamic banks (IBs) and Conventional banks (CBs) from 2009 to 2019. By leveraging the two‐step process generalized method of moments (GMM) estimator presented by Blundell and Bond (1998), we address potential endogeneity concerns associated with bank capitalization. Our examination, while controlling for bank‐specific and macroeconomic factors, demonstrates a noteworthy positive effect of ESG on overall bank performance, particularly attributable to the governance element. Curiously, our analysis indicates that while the governance factor of ESG positively affects IBs, it does not produce a similar impact on the performance of CBs. This differential effect highlights the distinct operational structures inherent in these banking paradigms and enriches the literature by offering empirical insights into how ESG factors affect bank performance differently within dual banking systems. The implications of the research advocate for policymakers and bank executives, particularly in Islamic banking, to devise tailored governance approaches to bolster ESG integration and performance.