The nexus between ESG practices and bank performance: evidence from European countries

Purpose This paper aims to study the relationship between ESG practices and banking performance for European countries over the period 2012 to 2023. Design/methodology/approach Using the CCA technique, the study offers simultaneous analysis of the link between a set of ESG practices and a set of bank performance indicators. Findings The empirical results support stakeholder theory and show that banks with better environmental, social and governance are better-performing than non-responsible banks. In turn, banks' performance measures explain the variance among a set of ESG activities. However, the influence of ESG involvement on banking performance is found to be more pronounced. Research limitations/implications The study did not consider short- and long-run causalities relationships between ESG practices and bank performance indicators. Furthermore, the integration of macroeconomic variables could affect the empirical results. Practical implications Our empirical results provide implications for bankers as well as for public authorities. Indeed, European bank managers should be more aware than before of the importance of ESG practices to improve their performance. Moreover, public authorities and policy makers dealing with both economic and social well-being are required to simultaneously pursue environmental, social and governance-centered industry enforcement policies for banking institutions. Originality/value This study goes beyond the existing literature by disaggregating the three ESG pillars to investigate the individual impacts of different components of each pillar on a set of performance indicators introduced simultaneously, including banks' profitability, risk, efficiency and market value. The second contribution of the study is related to the use of a multivariate approach termed canonical correlation analysis (CCA), to empirically assess the relationship between a set of performance measures and a set of ESG dimensions.