Do ESG Factors Enhance Bank Stability? Evidence from Emerging Markets

Abstract

This study examines the relationship between environmental, social, and governance (ESG) performance and bank default risk in the E7 emerging economies over the period 2013–2024. Using a panel dataset of publicly listed banks, the analysis evaluates whether overall ESG performance and its individual dimensions contribute to financial stability while accounting for bank-specific and macroeconomic factors. The findings indicate that stronger overall ESG performance is associated with lower bank default risk. However, the effects of individual ESG dimensions are heterogeneous. The social dimension strengthens financial stability, whereas the environmental and governance dimensions exhibit weaker or mixed effects, particularly in the short-term, reflecting transition-related costs and institutional differences across emerging markets. The originality of this study lies in its comprehensive assessment of ESG performance at both the aggregate and component levels within the E7 banking sector, a setting that has received limited attention in the existing literature. By providing evidence from major emerging economies, the study extends current knowledge on the ESG–risk nexus and highlights the importance of considering institutional heterogeneity when evaluating the financial implications of sustainability practices. The findings offer practical implications for bank managers, investors, and policymakers by suggesting that effective ESG integration can strengthen bank resilience and support the development of more sustainable and stable financial systems.