Purpose This paper aims to investigate the bank environmental, social and governance (ESG) performance and profitability relationship by focusing on the heterogeneous response of Islamic and conventional banks to negative ESG-related news. Design/methodology/approach The analysis uses an unbalanced panel of 547 banks globally from 2000 to 2024 using a two-step system generalized method of moments approach to estimate the impact of ESG and ESG controversies across Islamic and conventional banks. Findings Higher ESG scores are positively associated with higher bank profitability. However, there is heterogeneity in the response of Islamic and conventional banks to ESG performance. Nonlinearity is also found in the response to ESG controversies. Although the marginal effect of higher ESG scores is greater for Islamic banks, they are more adversely impacted by ESG controversies, highlighting greater susceptibility to negative ESG news. Originality/value This study advances understanding of ESG performance’s influence on bank profitability. It extends the understanding of the asymmetrical impacts of ESG controversies across different types of banks. These findings contribute to sustainable finance literature and emphasize the need to recognize reputational exposures and strengthen Shariah ESG integration and move beyond treating ESG as an implicit byproduct of Shariah compliance.
Mohammad et al. (2026) studied this question.