How Do ESG and Innovation Strategies Affect Bank Performance and Risk Stability? Panel Evidence from Taiwan’s Banking Industry

Sustainable finance, digital financial innovation, and green innovation have become central strategic pressures in banking, yet their joint effects on bank performance and risk remain insufficiently understood. This study develops an integrated ESG-innovation framework and examines quarterly panel data for 24 Taiwanese financial holding and domestic commercial banks from 2016Q1 to 2025Q3, yielding 934 bank-quarter observations. Return on assets (ROA) and the Z-score are used to capture operating performance and financial stability, respectively, and bank fixed-effects panel models are estimated for high- and low-ESG as well as high- and low-innovation subsamples. The re-estimated results reveal a conditional sustainability effect: ESG and innovation do not generate homogeneous financial benefits, but depend on banks’ ESG foundations, innovation intensity, leverage, and scale. Environmental scores are positively associated with ROA in the high-ESG subsample and weakly positive in the low-ESG subsample, whereas credit card transaction expansion is costly for low-ESG banks. In high-innovation banks, credit card transaction volume and green patents are negatively associated with ROA, suggesting adjustment costs and diminishing marginal returns. For financial stability, ESG recognition and green patents are more beneficial in lower ESG or innovation contexts, while leverage is consistently negative across all specifications. These findings contribute to the sustainable finance literature by clarifying how ESG, FinTech-related innovation, and green innovation jointly shape bank performance and risk in a policy-driven emerging market. The results also suggest that banks and regulators should adopt differentiated ESG and innovation strategies rather than assuming that sustainability investment produces uniform outcomes.