Sustainability Reporting in Banking and Financial Services Sector: A Regional Analysis

The paper introduces the increasing importance of sustainability reporting, particularly Environmental, Social, and Governance (ESG) factors, in the banking and financial services sector since the 2008 global financial crisis and the COVID-19 pandemic. It notes inconsistent findings in existing literature regarding the impact of ESG on financial performance and aims to address this gap by providing an international, regional analysis. The study's four main objectives are to empirically examine the influence of ESG on financial performance across seven regions, dissect ESG into its pillars to observe regional divergences, control for heterogeneous country factors, and explore the moderating effects of country governance.

This section outlines the theoretical foundations for the relationship between sustainability reporting and financial performance, categorizing them into theories supporting positive impact and those suggesting negative impact. Supporting theories include 'Agency Theory', which posits that sustainability reporting reduces agency costs and information asymmetries, leading to improved financial performance, and 'Stakeholder Theory', which suggests managing relationships with all stakeholders (not just shareholders) enhances long-term survival and optimal balance. Conversely, 'Trade-off Theory' (or traditionalist view) argues that investments in social and environmental goals increase costs, harm profitability, and impair competitive advantage. The review also discusses mixed empirical results in prior studies regarding the relationship between ESG, its pillars, and various performance measures (operational, financial, and market), leading to the formulation of three hypotheses.

The study analyzes a sample of 4458 observations from 60 countries over the period 2008-2017, with ESG data sourced from the Bloomberg database. Dependent variables are operational performance (ROA), financial performance (ROE), and market performance (Tobin's Q). Independent variables include the overall ESG score and its three pillars (Environmental, Social, Governance), lagged by one year to account for future effects. Control variables encompass bank-specific factors (financial leverage, total assets) and macroeconomic factors (GDP per capita growth rate, and six Worldwide Governance Indicators). The methodology also details diagnostic tests conducted for data normality, variable stationarity, collinearity, autocorrelation, and heteroscedasticity to ensure the validity and reliability of the regression models.

The overall findings indicate a significant negative correlation between ESG and operational (ROA), financial (ROE), and market (TQ) performance for the entire sample. This aligns with the 'trade-off theory,' suggesting that the immediate costs of sustainability reporting may outweigh short-term benefits, potentially affecting intangible assets and shareholder satisfaction. However, a regional analysis reveals significant divergences: ESG is negatively correlated with ROA in Australia, Europe, North America, and Africa, but positively correlated in the MENA region. ESG-ROE shows negative correlation in Europe and North America, positive in MENA, and insignificant elsewhere. For ESG-TQ, the relationship is negative in Europe, North America, and Africa, positive in Asia, MENA, and South America, and insignificant in Australia. These regional variations underscore the importance of considering political and economic contexts.

The study concludes that while ESG often shows a negative correlation with banking sector performance at a global level, regional disparities are significant. The research provides theoretical implications for policymakers and academics by offering a basis for comparing sustainability reporting effects across diverse institutional contexts. The findings highlight the benefit of embracing sustainability in certain regions and the varied impact of ESG reporting on bank performance. Limitations include relying solely on the quantity rather than the quality of ESG disclosure from Bloomberg, and the sample being restricted to listed banks. Future research is recommended to use mixed methods, incorporate qualitative data, and expand the sample to include non-listed banks and small-to-medium businesses for a more comprehensive understanding.