The impact of environmental practices and policies on a bank’s financial performance

Abstract Rising pollution and global warming have intensified the debate over the compatibility between economic development and environmental protection. In this context, banks play a strategic role in encouraging environmental practices through lending and investing. This role primarily involves extending green loans and financing projects that promote sustainable development. However, there is no consensus about banks’ profitability in relation to their commitment to environmental sustainability. Thus, this study investigates the relationship between banks’ financial performance and their environmental sustainability practices and policies—both direct and indirect—as well as the moderating effect of such practices and policies. These objectives are examined using a global panel of 579 publicly traded commercial banks from 2014 to 2023, estimated through dynamic regression models and subjected to robustness tests. In addition, the generalized method of moments (GMM) was employed to mitigate potential endogeneity and unobserved variability. The results show that environmental sustainability practices and policies, individually, improve banks’ financial performance. Furthermore, global policies moderate the effect of internal practices on bank profitability and value. The findings contribute to the academic literature and are consistent with corporate finance theories, offering a comprehensive assessment of environmental initiatives in the banking sector. They emphasize the importance of integrating internal practices and global policies on environmental sustainability as a strategy that goes beyond institutional responsibility and legitimacy concerns. Aligned with the demands of all stakeholders, such an approach ultimately contributes to profitability and value creation for banks’ shareholders in the short and long term.