Environmental, Social and Governance (ESG) Dimensions and Bank Performance: A Systematic Literature Review

ABSTRACT This paper conducts a systematic literature review (SLR) on ESG and bank performance relationship by identifying, evaluating and synthesising existing research following the guidelines of Preferred Reporting Items for Systematic Reviews and Meta‐Analyses (PRISMA). The paper analyses 36 selected articles based on two search engines—Scopus and Web of Science—appropriate keywords and inclusion as well as exclusion criteria, respectively. Analysis of the reviewed articles identifies six themes based on the evidence of varying associations between ESG and bank performance, the role of corporate governance in enhancing bank performance, the role of audit quality as a moderating variable between ESG and bank performance, the fintech and ESG performance of banks, the role of bank competition in enhancing the ESG performance of banks and evidence of the application of alternative panel regression techniques. Findings reveal that ESG generally enhances long‐term stability and risk management practices of banks by reducing systemic risk and, thereby, helps to build the reputation of the banking system. Our analysis further reveals that whereas social and governance pillars of ESG provide mixed evidence, environmental initiatives consistently yield the strongest positive financial and reputational outcomes. In particular, environmental and governance issues create lasting impacts on banks' businesses and mitigate adverse consequences on society and the environment. Findings also reveal that integrating a bank's ESG performance into bank competition and fintech would enhance business ease and create significant societal value. The study further shows that audit quality acts as a governance mechanism in the relationship between ESG and bank performance in emerging markets and becomes instrumental in mitigating information asymmetry and enhancing trust among shareholders.