Do ESG factors enhance bank profitability? Global panel evidence

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Type of the article: Research Article

Abstract
The growing focus of the IMF, World Bank, OECD, and European Commission on aligning finance with the Sustainable Development Goals (SDGs) raises the question of whether sustainability enhances banking sector profitability. This study aims to assess the impact of SDG performance on bank profitability, measured by return on assets (ROA), return on equity (ROE), and interest margin to gross income, controlling for GDP growth and inflation. The analysis uses an unbalanced panel of 143 countries over 2000–2024 (more than 2,100 country-year observations), applying fixed effects, random effects, and multilevel models with robust covariance estimators. The results show that the SDG Index Score has a weak and inconsistent effect on profitability. It is weakly positive for ROA (β = 0.125, p = 0.085) and marginally positive for interest margins (β = 0.151, p = 0.019), but becomes insignificant under robust specifications. For ROE, the SDG Index turns significantly negative in the random effects model (β = –0.119, p = 0.001), suggesting that higher SDG performance may be associated with lower equity returns. In contrast, the macroeconomic controls are robust across all models: GDP growth increases ROA (β = 0.107, p < 0.001) and ROE (β = 0.108, p < 0.001) but reduces interest margins (β = –0.061, p < 0.001), while inflation consistently raises profitability across all indicators. Regional patterns further indicate lower profitability in OECD and Western Europe and higher interest margins in East and South Asia, Latin America, and MENA.

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    • Table 1. Descriptive statistics of main variables (2001–2024)
    • Table 2. FE and RE estimation results with the Hausman test
    • Table 3. Robust fixed effects estimations with alternative covariance structures
    • Table 4. Multilevel model (countries nested in regions) estimation results
    • Table 5. RE model with regional dummy variables
    • Table 6. FE vs. RE estimations for ROE
    • Table 7. Robust fixed effects estimations for ROE
    • Table 8. Random effects estimation for ROE with regional controls
    • Table 9. FE vs. RE estimations for interest margin to gross income (y3)
    • Table 10. Robust fixed effects estimations for interest margin to gross income (y3)
    • Table 11. Random Effects estimation for interest margin to gross income (y3) with regional controls
    • Conceptualization
      Shadiyya Amanova, Bulqeyis Novruzova, Zahid Ganbarov
    • Formal Analysis
      Shadiyya Amanova, Bulqeyis Novruzova, Zahid Ganbarov
    • Methodology
      Shadiyya Amanova, Bulqeyis Novruzova, Zahid Ganbarov
    • Project administration
      Shadiyya Amanova, Sakina Hajiyeva, Javid Huseynli
    • Supervision
      Shadiyya Amanova, Sakina Hajiyeva
    • Writing – review & editing
      Shadiyya Amanova, Bulqeyis Novruzova, Javid Huseynli
    • Investigation
      Bulqeyis Novruzova, Sakina Hajiyeva, Ali Hanifayev
    • Resources
      Bulqeyis Novruzova, Zahid Ganbarov, Javid Huseynli
    • Validation
      Zahid Ganbarov, Ali Hanifayev
    • Writing – original draft
      Zahid Ganbarov, Sakina Hajiyeva, Ali Hanifayev
    • Data curation
      Sakina Hajiyeva, Javid Huseynli, Ali Hanifayev
    • Funding acquisition
      Sakina Hajiyeva, Javid Huseynli, Ali Hanifayev
    • Software
      Sakina Hajiyeva, Javid Huseynli, Ali Hanifayev
    • Visualization
      Javid Huseynli, Ali Hanifayev