ESG And Market Power: Evidence From a Concentrated Financial Sector

ABSTRACT This study examines the impact of Environmental, Social and Governance (ESG) factors on market power in the Kuwait financial sector for the period 2018–2023. Market power is measured using stochastic frontier analysis (SFA), and the System Generalized Method of Moments (GMM) is employed as the main method. The results reveal that ESG integration increases operational complexity in generating loans and raises the cost of funds. Empirically, both aggregated and disaggregated ESG factors positively affect market power, enhancing financial institutions' pricing ability through lagged effects. Strong institutional quality reduces market power, supporting a competitive financial sector. Overall, while ESG integration strengthens individual market power, robust institutions play a critical role in ensuring that sustainability practices do not reinforce market concentration.