The environment, social and governance (ESG) activities and profitability under COVID-19: evidence from the global banking sector

Purpose>This study investigated the impacts of the environment, social and governance (ESG) and its components on global bank profitability considering the COVID-19 outbreak.Design/methodology/approach>This study used a system generalized method of moments (GMM) proposed by Arellano and Bover (1995) to investigate the relationship between ESG and bank profitability using an unbalanced sample of 487 banks from 51 countries from 2006 to 2021.Findings>The findings generally found that ESG activities may reduce bank profitability, thus supporting the trade-off hypothesis that adopting ESG standards could increase bank costs while lowering profitability. In addition, there is a U-shaped relationship between ESG and bank profitability, suggesting that ESG activities can help improve bank performance in the long term. Such an effect is the first time observed in the global banking sector. This study’s results are robust across different models and settings (e.g., developed vs. developing countries, different levels of profitability, and samples with vs without US banks).Practical implications>This study provides empirical evidence to support many countries' sustainable development policies. It also provides empirical incentives for bank managers to be more ESG-oriented.Originality/value>This study provides a better understanding of the roles of ESG activity and its components in the global banking system, considering the recent crises.