Too much doing good: An international evidence of ESG-risk nexus in banking industry

This study investigates the nonlinear ESG-risk nexus in banking using 4255 bank-year observations (64 countries, 2002–2022). Addressing endogeneity via System GMM and Heckman two-step models, we identify a U-shaped relationship: moderate ESG engagement reduces risk through stakeholder trust, while excessive ESG investment heightens risk, aligned with agency cost theory. Sovereign ESG (SESG) substitutes bank-level ESG, flattening the U-shape in nations with robust sustainability frameworks. Results hold under dynamic panel threshold and kink regressions, challenging linear ESG-risk assumptions and advancing a contingency framework. Theoretically, we extend institutional theory by demonstrating macro-level ESG’s moderating role and agency theory by pinpointing thresholds where ESG shifts from risk-mitigating to risk-enhancing. Policy implications urge context-specific regulation—prioritizing foundational ESG in weak institutional environments—while practitioners should align ESG intensity with national sustainability maturity to optimize risk outcomes.