Does the bank’s nature heterogeneity matter? Environmental, social and governance (ESG) performance and corporate profitability

Purpose This study explores the impact of environmental, social and governance (ESG) performance on corporate profitability in Chinese commercial banks from 2012 to 2022, examining how inherent differences across bank types moderate this relationship. Design/methodology/approach Using two-way fixed effects, 2SLS (instrumental variables), simultaneity tests and system GMM, the study analyzes the effects of ESG on profitability while addressing endogeneity. To capture heterogeneity, the sample is stratified by ownership (state-owned vs non-state-owned), governance (joint-stock vs non-joint-stock) and location (urban vs rural). Findings The results show that ESG performance positively impacts profitability in both rural and urban commercial banks, with governance performance negatively affecting urban banks. ESG negatively influences profitability in state-owned banks, whereas non-state-owned banks benefit from positive ESG performance. Environmental performance positively affects profitability in both types of banks, but governance has a negative impact. ESG boosts profitability in joint-stock banks but detracts from it in non-joint-stock banks. Social activities positively affect profitability across both bank types, while environmental activities are insignificant. Governance activities enhance profitability in joint-stock banks but reduce it in non-joint-stock banks. Practical implications Policymakers should create tiered ESG regulations, incentivizing market-driven banks while subsidizing state-owned banks’ compliance costs. Bank managers should tailor ESG investments, focusing on environmental and social initiatives based on location and investors must evaluate ESG scores contextually. Originality/value This study provides a granular analysis of ESG-profitability linkages across China’s heterogeneous banking landscape, highlighting how institutional characteristics such as ownership, governance structure and geographic focus shape the financial implications of ESG.