Does green banking performance pay off? Evidence from a unique regulatory setting in Bangladesh

Abstract Research Question/Issue A firm's choice to “go green” largely remains unregulated worldwide. This study uses an institutional setting in Bangladesh experiencing a green banking regulatory reform to examine whether banks' green performance translates into improved financial performance and whether this is moderated by banks' political connections. Research Findings/Insights Results based on a sample of 172 firm‐year observations from 2008 to 2014 suggest that green banking performance is positively associated with a bank's financial performance. Further analysis suggests that cost efficiency mainly drives this relationship. However, banks' political connections negatively affect this relationship by counterbalancing green banking's non‐financial benefits. Our findings are robust to sensitivity tests that examine endogeneity concerns using difference‐in‐differences (DiD) and propensity score matching (PSM) analyses and Heckman's two‐stage analysis. Theoretical/Academic Implications Most prior studies on corporate social responsibility (CSR) were conducted in voluntary settings: however, our study utilizes a unique regulatory setting in Bangladesh. With this exogenous shock to the banking industry, the regulatory setting helped to alleviate endogeneity concerns arising from voluntary motives behind CSR performance. To the best of our knowledge, this is the first study to examine any link between green banking performance in a regulatory setting and banks' financial performance. Practitioner/Policy Implications This study's findings suggest that sustainable business practices promoted through regulatory intervention can improve financial performance. A regulatory green banking initiative can be a win–win for all competing stakeholders. Our findings have significant policy implications for governments and regulatory agencies worldwide in the fight against global warming and climate change.