ESG performance and financial performance in banks: a comparative analysis of China and the USA under environmental uncertainty and COVID-19

This paper investigates the relationship between environmental, social, and governance (ESG) performance and financial performance of banks in the two world’s largest economies, with the moderating impact of environmental uncertainty (e.g., “operational revenue volatility”) and COVID-19. Using unbalanced secondary data of 315 banks spanning from 2011 to 2022, we examine both the direct and non-linear effects of ESG performance on financial performance, employing advanced econometric estimation techniques such as two-step system GMM (2sGMM) and two-stage least squares (2SLS). The analysis finds that: (i) ESG performance positively influences financial performance in both Chinese and US banks, with China showing a stronger effect due to its evolving regulatory landscape, while the relationship in the US is more nuanced, given the mature ESG framework. (ii) The results also confirm that ESG performance non-linearly influences financial performance across the samples, with an inverted U-shape relationship; (iii) Additionally, we further investigate the moderating impacts of environmental uncertainty and COVID-19, uncovering that environmental uncertainty dampens the nexus between ESG performance and bank financial performance, while COVID-19 further amplifies it. This study contributes to the existing literature by offering a comparative perspective on the effect of ESG performance on financial outcomes across different economic contexts and presents valuable insights for policymakers, regulators, and financial institutions aiming to navigate the emerging landscape of ESG performance amidst global uncertainties.