ESG practices and bank efficiency: new evidence from an oil-driven economy

Ali Shaddady · Faisal Alnori

28 citations0/0 files storedInternational Journal of Islamic and Middle Eastern Finance and Management

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Corporate Social Responsibility Reporting Efficiency Analysis Using DEA Sustainable Finance and Green Bonds

Abstract

Purpose The purpose of this paper is to investigate whether banks’ environmental, social and governance (ESG) initiatives increase or decrease banks’ efficiency. Design/methodology/approach The sample used includes all listed banks in Saudi Arabia over the years 2016–2021. The authors performed different methods, including data envelopment analysis (DEA), ordinary least squares (OLS) and quantile regressions. Findings The OLS regression results show a negative linkage between ESG and banks’ efficiency. Further, the quantile regression analysis indicates that the ESG effect on banks' efficiency is negative across different quantiles. However, the DEA method shows that the DEA-generated scores for Banks’ efficiency are higher for ESG-adjusted scores in comparison to efficiency scores without incorporating ESG. Further, the comparison of the DEA-generated efficiency scores, over the sample period, of adjusted ESG banks still suffers from decreasing in their efficiency over the years. Concerning existing theory, the results are consistent with the stakeholders and the resource-based theories postulating that banks' ESG practices are ethical commitments and enable firms to gain competitive advantage and increase their reputation among stakeholders. Practical implications The findings of this study offer important implications for regulators and bankers. Policymakers and bank regulators should make collective efforts to encourage financial institutions to adopt green finance initiatives to create an efficient financial system capable of counteracting risks from the external environment and stimulating economic growth. Banks’ managers should be aware that ESG initiatives serve society and the environment and offer a positive influence on banks’ efficiency. Originality/value To the best of the authors’ knowledge, this is the first study to explore the influence of ESG activities on banks' efficiency using DEA for banks in Saudi Arabia.

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References

1985AN EMPIRICAL EXAMINATION OF THE RELATIONSHIP BETWEEN CORPORATE SOCIAL RESPONSIBILITY AND PROFITABILITY.2006The link between competitive advantage and corporate social responsibility 1995Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics 2020The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China 1970A Theoretical Framework for Monetary Analysis 2018Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector 2002The Link Between Corporate Social and Financial Performance: Evidence from the Banking Industry 2013Corporate social responsibility in the banking industry: Motives and financial performance

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2024The Influence of Environmental, Social, and Governance Issues in the Banking Industry 2024From ethics to efficiency: Understanding the interconnected dynamics of ESG performance, financial efficiency, and cash holdings in China

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