The Influence of Environmental, Social, and Governance Issues in the Banking Industry

The adoption of the Sustainable Development Goals (SDGs) in 2015 has made ESG issues central to public policy and corporate strategies. Integrating ESG into core business has become a critical driver of change in the global banking industry, impacting risk management and long-term sustainability. This shift from purely profit-driven models presents both challenges and opportunities for banks to enhance sustainability and attract socially conscious investors. Research on ESG practices in banking has evolved significantly, expanding from a broad ethical lens to examining specific institutional behaviors and their economic influence, particularly in driving financial resources towards green energy initiatives. While overall ESG scores may not directly impact return on assets (ROA), a positive correlation between ESG and return on equity (ROE) has been observed in some regions. Strong ESG practices can also buffer against systemic tail risk shocks, highlighting the need for collaboration between policymakers and regulators to incentivize green and social finance initiatives. This study aims to fill knowledge gaps by analyzing existing ESG research to identify leading topics and areas for further investigation to optimize financial performance and risk management for sustainability.

Understanding ESG integration in banking requires exploring key theoretical frameworks. Stakeholder theory, developed by Freeman (1984), suggests that banks must consider the diverse interests of all stakeholders, from shareholders to the broader community, to develop sustainable strategies that enhance long-term value and societal welfare. Agency theory, introduced by Jensen and Meckling (1976), addresses potential conflicts of interest between principals (shareholders) and agents (executives). It explains how managers might overinvest in sustainability for personal gain or to mitigate corporate wrongdoing, emphasizing the need for transparency and accountability to align executive interests with stakeholders. Institutional theory, rooted in DiMaggio and Powell's (1983) work, highlights the role of norms, values, and regulatory frameworks in shaping organizational behavior. It explains how banks enhance legitimacy and reputation by conforming to institutional norms and expectations, fostering sustainable practices, and impacting financial performance within diverse regulatory and cultural environments.

This study performs a scientometric and bibliometric analysis using PRISMA reporting guidelines. Data was collected from Scopus and Web of Science (WoS) databases over 20 years (2003 to March 2024). The search terminology used was 'bank*' AND ESG, with exclusions for specific subject areas. This yielded 416 and 476 results from Scopus and WoS, respectively. After merging and cleaning, 205 duplicate entries were removed, resulting in a refined corpus of 673 unique research studies. Mendeley was used for cataloging. VOSviewer and Bibliometrix R-package were employed for visualizing research results and identifying principal researchers, institutions, countries, and emerging research topics. Google Scholar was also used to obtain total global citation indicators (TGC) for comparison with total citations in the topic (TCT) from Bibliometrix. This comprehensive approach allowed for an in-depth examination of research trends and collaborations within the field.

The analysis of 673 unique research studies revealed an unsteady growth pattern with an average annual growth rate of 21.62%, involving 1589 researchers and 1892 author's keywords. Publications remained low from 2003 to mid-2019 due to nascent ESG awareness, limited regulatory pressure, and a traditional focus on profitability. A sharp increase in publications from 2019 to 2023 is attributed to the COVID-19 pandemic, which highlighted the importance of sustainability and adaptability, and increased regulatory focus on ESG practices by bodies like the European Central Bank and the Task Force on Climate-related Financial Disclosures (TCFD). Italy leads in research with 79% single-country publications (SCPs), followed by China and the UK. The USA and Italy are the most cited countries, with significant international collaborations, such as Italy-USA and Italy-Germany. Top institutions include Sapienza Università di Roma, Ahlia University, and Université du Québec à Montreal. Amina Buallay is the most productive author with nine studies focusing on sustainability's effects on banking, followed by Paolo Agnese and Kais Bouslah. Amina Buallay's 2018 study, 'Is Sustainability Reporting (ESG) Associated with Performance?', is highlighted as particularly influential with 342 citations, examining the varied impact of environmental, social, and governance components on bank financial performance (ROA, ROE, Tobin's Q).

Keyword analysis reveals two major research trends:</p> 1. **Corporate Social Responsibility and Financial Performance:** This trend examines the influence of corporate social responsibility, financial performance, and ESG issues on banks. Recent studies indicate banks are increasingly integrating ESG into their core business and lending. Research from China suggests ESG investments improve financial performance, especially environmental (E) and governance (G) investments. European banks are affected by affiliations with the oil and gas industry, and incorporating ESG can reduce funding costs, with environmental issues playing a minor role in depositor preferences. 2. **Regional Variations and Stakeholder Impact:** This trend focuses on the influence of ESG across different countries (developed, undeveloped, developing) and regions like MENA, Lebanon, and Central and Eastern Europe. Literature reviews are common methodologies in this trend, exploring the outcomes of ESG integration on financial performance and management. The role of stakeholders is also emphasized, with studies delving into how stakeholder activities tied to ESG transform bank performance. Furthermore, research on banks' risk examines how climate risk exposure and ESG performance are interconnected, with positive ESG sentiment reducing risk-taking and polemics affecting bank value. Thematic analysis categorizes topics by density (development) and centrality (relevance). Niche themes like greenwashing and stranded assets are well-developed but lack broader influence. Basic themes such as corporate governance and ESG performance are fundamental but require further development. Financial stability, systematic risk, and environmental risk are central but moderately developed, indicating a need for deeper exploration. The absence of themes in the 'Motor' quadrant suggests a lack of powerful, driving themes in ESG discourse, while a lack of 'Emerging or Declining' themes indicates a stable but potentially myopic research focus, highlighting areas for future research innovation and a more dynamic, integrated approach.

Previous research, like Galletta et al. (2022), highlights the increasing importance of ESG in banking, evolving from an initial focus on Corporate Social Responsibility (CSR). More recent studies, such as Galletta and Mazzù (2023), demonstrate positive effects of ESG implementation, with lower ESG 'polemics' correlating with reduced risks. Shakil et al. (2019) found positive associations between environmental and social performance and financial metrics for banks in emerging markets, though governance showed mixed effects. Buallay (2018) details the varied impact of individual ESG components on financial performance (ROA, ROE, Tobin’s Q), noting a potentially negative impact of CSR (social perspective) due to prioritization of environmental issues. These findings underscore the importance of considering each ESG aspect individually. While a strong positive drive for ESG in banking is evident, the results can be mixed, often influenced by the geographical focus and database sources of the studies. Future research opportunities include: assessing ESG impact on bank performance, delineating best practices, formulating frameworks for long-term sustainability, and examining regulatory and institutional pressures. Overcoming trends indicate a shift towards enhanced transparency, stakeholder engagement, and sustainable finance strategies, yet standardized reporting frameworks are still needed. Influential researchers like Amina Buallay, Christian Klein, and George Serafeim have significantly contributed to understanding these dynamics. Future directions should explore corporate governance and deeper dives into financial stability, systematic risk, and environmental risk, especially in under-researched regions like Latin America, to determine if ESG effects are similar to those in the US and Europe. Limitations include the reliance on only two databases (Scopus, WoS) and the broad nature of ESG metrics. This study, through its comprehensive scientometric analysis, contributes to existing literature by offering a deeper and more accurate understanding of ESG practices in banking, encouraging collaboration for ongoing challenges, and facilitating new research questions.