When ESG Becomes Value: Stock Market Rewards of Sustainable Banking in Europe

This study examines the relationship between sustainable investing and stock performance in the European banking sector. Specifically, it investigates the impact of the overall ESG score as well as the individual ESG pillars on stock performance, with particular attention to differences across high‐capital‐buffer and large‐sized banks. The empirical findings demonstrate a positive relationship between the bank's sustainability practices and the stock performance, with net interest margin as a moderating variable, strengthening the relationship between the banks' sustainability and stock performance. To ensure robustness, a two‐step system GMM was implemented, which supports and reinforces the study's conclusions. Heterogeneity analysis reveals that ESG activities are seen as more credible and valuable when banks have strong capital and are large in size. For practical implications, banks with strong capital and stable interest income can use ESG to create value, while weaker banks should first improve their financial position before focusing heavily on ESG. For investors, ESG performance should be assessed together with a bank's capital level and profitability, as ESG signals are more meaningful when supported by strong financial fundamentals. For regulators and policymakers, ESG requirements may affect banks differently: large and well‐capitalized banks can adopt ESG rules more easily without harming shareholder value, while smaller or weaker banks may face higher adjustment costs.