When ESG Starts to Pay Off: Nonlinear PSTR Evidence on Bank Performance and Stability in Europe and the USA

This paper investigates the impact of Environmental, Social, and Governance (ESG) performance on the financial outcomes of 68 European and 60 U.S. banks over the period 2010–2022 using a Panel Smooth Transition Regression (PSTR) framework. Unlike traditional linear models, the PSTR approach captures the nonlinear, regime-dependent effects of ESG engagement on bank profitability, measured by ROA and ROE, and financial stability, measured by the Z-score. Our empirical findings reveal a critical ESG threshold in both regions, above which banks experience substantial improvements in profitability and resilience. Comparative analysis indicates that while ESG enhances stability slightly more in European banks, U.S. banks tend to achieve marginally higher profitability gains. Control variables, including bank size, capital adequacy, leverage, and macroeconomic conditions, also play a significant role in shaping performance. These results underscore the importance for banks to attain a minimum ESG maturity to fully realize the benefits of sustainable practices. The study provides valuable insights for bank managers, investors, and policymakers seeking to promote a sustainable and resilient banking sector across Europe and the United States.