ESG and financial performance of banks in the MENAT region: concavity–convexity patterns

ABSTRACT

This study aims to investigate the impact of Environmental, Social and Governance (ESG) on bank performance (FP) in the Middle East, North Africa and Turkey (MENAT) region. The sample consists of 46 listed banks between 2007–2019. FP is measured through accounting (Return on Assets Return on Equity) and market indicators (Tobin’s Q Stock Return ). We test the effect of ESG and its quadratic term on FP by controlling for bank-specific, macroeconomic and financial development variables. Our results support the presence of a non-linear ESG–FP relationship. ESG incremental investments remain beneficial till reaching an inflection point. Interestingly, the financial development variables are significant, while ESG pillars follow different patterns. Governance pillar has a concave relationship with accounting performance while environmental pillar has a convex relationship with the market return. The ESG–FP relationship depends on three vectors: pillars; measure of FP; and level of ESG. Banks should determine ESG turning points to rationalize their investments and contemplate efficient returns.

KEYWORDS:

• MENAT countries
• bank accounting and market performance
• ESG disclosure
• environmental score
• social score
• governance score

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 According to World Bank, the 21 countries included in the MENA are Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, UAE, Gaza and Yemen.