ESG compliance and financial performance: a comparative study of Islamic and conventional banks in the MENAT region

Purpose This study aims to examine how environmental, social and governance (ESG) compliance affects the financial performance of Islamic and conventional banks in the MENAT region, addressing a gap in understanding ESG’s role within Shariah-compliant banking. Design/methodology/approach Using panel data from 43 banks (2018–2022) and a system Generalized Method of Moments estimator, this study evaluates the impact of overall ESG scores on profitability and conducts an exploratory assessment of the ESG dimensions. Findings ESG influences profitability in both banking models but in nonlinear ways. Islamic banks exhibit a concave relationship, where moderate ESG engagement enhances ROA before marginal benefits decline. Conventional banks display a convex pattern: ESG initially imposes costs but becomes beneficial at higher adoption levels. ESG dimensions show heterogeneous effects reflecting differences in governance structures and regulatory environments. Practical implications Results highlight the need for banking-model-specific ESG strategies. Policymakers should strengthen disclosure standards and support sustainable finance instruments, while banks can enhance performance by aligning ESG initiatives with their operational and ethical frameworks. Originality/value This study provides one of the first comparative analyses of ESG–performance dynamics in Islamic and conventional banks in the MENAT region, offering new evidence on non-linear effects and institutional differences in sustainability integration.