The ESG-insurance: Unraveling the interlinkage among policy uncertainty, ESG practices, and bank efficiency

We document a significant decline in the efficiency of US banks in response to rising economic policy uncertainty (EPU) and its components. We further demonstrate that this outcome is independent of bank size but more pronounced for banks experiencing low funding liquidity and inferior asset quality. Banks that adopt better environmental, social, and governance (ESG) policies tend to remain more efficient during policy crises, supporting the stakeholder theory of ESG practices. ESG-insurance is valid for all three dimensions of ESG and is more prominent for the government spending, inflation, and tax components of EPU. Our results remain robust through different estimation techniques, including a two-stage efficiency analysis, instrumental variables-based Tobit regression, and a propensity score matching estimation. Our study underscores the strategic imperative of adopting sustainable banking practices to enhance bank resilience and performance in an increasingly uncertain economic landscape.