1. Introduction
Sustainability development has attracted much attention from practitioners, investors and policymakers. According to the report of CFA Institute (2019), more than 2,300 investment
Mui Kuen Yuen, Thanh Ngo, Tu D.Q. Le and Tin H. Ho. Published in the Journal of Economics and Development. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at http:// creativecommons.org/licences/by/4.0/legalcodefirms with total assets of $US 86 trillion committed to disclosing environment, social and governance (ESG) integrated into their investment decisions, supporting the call from the United Nations (2018). Once the global economy is increasingly interconnected, the concerns about what needs to be disclosed to domestic and international stakeholders and authorities worldwide become critical. Wulf et al. (2014) alerted that financial accounting is insufficient to satisfy the needs of shareholders and suggested further reports such as sustainability reports (e.g., ESG disclosure) and value reporting. If shareholder maximization is considered the
firm's objective, increasing engagement in ESG activities should improve shareholder
value (Azmi et al., 2021). Indeed, the resource-based theory proposes that firms may perform better if they reveal more information about their financial and non-financial resources. These resources assist firms in strengthening their competencies and capabilities, which are crucial for accomplishing sustainable competitive advantage (Gaur et al., 2011).
However, the empirical evidence on the effect of ESG is miXed. The positive relationship between ESG activities and bank performance is documented by several studies such as Wu and Shen (2013), Shen et al. (2016) and Buallay (2019). The positive effect of ESG activities only holds up to the certain level of ESG investments (Azmi et al., 2021; El Khoury et al., 2021). Others show no relationship between ESG activities and bank performance (Soana, 2011).
Furthermore, the lessons from the global financial crisis of 2008 and the LIBOR scandal demonstrated the importance of understanding how ESG activities impact bank value (Hurley et al., 2014). Additionally, disrupted commodities and uncertainty created by the COVID-19 pandemic have challenged the global banking system more toward their ESG activities (El Khoury et al., 2021). Notably, the Sustainable Markets Initiative’s Financial Service Taskforce formed by the Prince of Wales and 40 global banks aims to understand the relationship between the banking industry and global sustainability efforts [1]. Additionally, Net-Zero Banking Alliance was also established by banks worldwide that forces bank members to align their financing and investment strategies using existing and new technologies and policies with net-zero emissions by 2030 [2]. All in all, there is evidence that ESG (and its pillars) can influence bank profitability, and that the recent COVID-19 pandemic
may affect such a relationship; however, this issue has not been examined. It motivated us to revisit the impact of ESG activities and its components on bank profitability, especially at a global scale, considering the COVID-19 outbreak.
Our findings show the negative impact of ESG activities on bankprofitability. The U-shaped relationship between ESG activities and bank profitability is also found. The same results are still obtained when observing ESG components. More importantly, our findings suggest that ESG activities are more likely to alleviate the negative impact of the COVID-19 pandemic on bank profitability. To be specific, our findings also document that environment and social pillars play critical roles in explaining the relationship between the COVID-19 turmoil and bank profitability. The same results still hold when several robustness checks are performed. This paper contributes to the literature in several ways. First, limited studies on ESG in the context of COVID-19 were primarily conducted in developed countries (Koutoupis et al., 2021). We further examine the relationship between ESG activities and bank profitability during the COVID-19 pandemic using banks in both developed and developing countries because banks engaged in the level of ESG activities may differ among these two groups. In contrast to Danisman (2022), who examined the impact of ESG activities on bank stock return in European countries, we investigate this correlation in the global context by using both
financial measures (return on assets and returns on equity) and a market measure (Tobin’s Q) as a robustness check. Second, we investigate whether ESG pillars contribute to mitigating the negative impact of the COVID-19 pandemic on bank profitability. Therefore, this would provide important implications for bank managers and policymakers in promoting ESG
activities in the banking system. Last, using a longer period allows us to study further the critical role of ESG activities in explaining bank profitability during the past crises, includingthe global financial crisis 2008 and the health crisis. To the best of our knowledge, this is the first attempt to do so. Nonetheless, our findings will add more evidence of ESG activities in two recent crises to the existing literature on the banking system.
The remainder of our study is outlined as follows. Section 2 provides a literature review on the effect of ESG and its components on bank performance. Section 3 describes the methodology and data used in this study. Section 4 presents empirical findings, while Section 5 concludes.
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