Connecting the ESG factors to banks’ financial performance and sustainability: the need for strategic alignment

This study examines the impact of Environmental, Social, and Governance (ESG) disclosure on bank performance in the MENA region, addressing a critical gap in research on emerging economies. To address this gap, this study develops a single, integrated analytical framework that unifies ESG metrics, firm-level attributes, and financial system perspectives. Aftermaths of the data by using Fixed/Random Effect and Generalized Method of Moments (GMM), this study effectively addresses potential endogeneity in panel data, ensuring robust and reliable findings. The results reveal a positive association between ESG dimensions and banks’ financial performance characterized by a nonlinear pattern. Moreover, the impact of individual ESG components on bank’s profitability is consistent across different measures of bank performance. Bank size also emerges as a critical determinant of performance both directly and through its moderating role in the ESG-performance relationship. Without discounting differential impacts on Islamic and conventional banks, the findings underscore the need for tailored strategies and refined ESG metrics to ensure effective integration across heterogeneous banking models. The study highlights the importance of aligning banking development with governance and institutional reforms to facilitate the transition from regulatory compliance to competitive advantage.