When Technology Meets Sustainability: Digital Transformation, Governance Competence Gap, and ESG Performance of Banks in Emerging Markets

ABSTRACT The ambiguity surrounding the impact of digital transformation on banking sustainability is an aggregation artifact. Analyzing 250 banks across 25 emerging markets (2015–2024) using fixed effects, we demonstrate that digitalization exerts opposing forces on environmental, social, and governance (ESG) pillars that cancel out at the composite level. Digitalization enhances social performance (financial inclusion) and environmental disclosure, but erodes governance through a technology‐governance lag. Decomposing the index reveals that governance costs are concentrated in advanced technologies (AI and blockchain), while social benefits derive disproportionately from foundational technologies. Board independence does not moderate this decline, indicating that the lag reflects a competence gap rather than an incentive gap. These results, robust to Oster bounds and regionally stable, imply that regulators can promote digital inclusion while mandating targeted board technological expertise, without imposing a negative trade‐off on the international competitiveness of emerging‐market banks.