Green Bond Issuance and Environmental, Social and Governance Scores: Do They Impact Bank Performance?

ABSTRACT This study investigates whether green bond issuance in the presence of environmental, social and governance (ESG) performance improvements affects banks' financial performance. Using a panel of 1738 bank‐year observations from 2009 to 2023, the study examines the efficacy of ESG pillars in enhancing the value of green bond issuance, particularly assessing its impact on profitability, funding costs and loan portfolio quality. The findings suggest that green bond issuance enhances the quality of banks' loans, particularly in the presence of increased environmental performance. Moreover, an enhancement in governance scores decreases the funding costs in the presence of green bond issuance, which signals heightened investor confidence and improved reliability. This study contributes to the literature on sustainable finance by indicating the extent to which green finance can expand the financial and risk‐related benefits of green bond issuance by banks. Moreover, the findings indicate the strategic value of incorporating ESG factors into capital market operations for bank managers. This study empirically demonstrates that ESG and green bond issues are effective in improving financial performance and achieving long‐term sustainable development goals in the banking industry.