Purpose This paper aims to analyse the impact of banks’ environmental, social and governance (ESG) practices on market performance (MP) in emerging markets with dual banking systems. The paper specifically investigates the significance of Sharia governance in enhancing the ESG-MP nexus. Design/methodology/approach The sample in this study consists of 107 banks from 11 selected countries that have dual banking systems, and it is analysed using panel data estimation approaches. Findings The analysis reveals that ESG positively and significantly impacts banks’ market-based performance. Moreover, when incorporating ESG practices into their banking operations, conventional banks see a greater positive impact than Islamic banks. This aligns when individual ESG pillars’ impacts on bank performance is analysed, except in the governance pillar, where Islamic banking performance is better off than conventional banks when incorporating this pillar into banking operations. This study also finds that Sharia governance quality matters in determining the nexus of ESG practices and Islamic banking performance. Practical implications Based on these findings, banking management should pay more attention on ESG issues as there is a strong incentive to do so, in form of higher market value. Particularly for Islamic banks, management must progressively work towards more sustainable and ethical banking operations, by substantively integrating ESG into their day-to-day operations. Furthermore, policymakers should also formulate well-harmonized ESG frameworks at the supranational level, including the key attributes for the Shariah Supervisory Board (SSB), so that robust measurements of Sharia governance quality can be constructed across various jurisdictions. Originality/value This study contributes to the theoretical development by explaining the relationship between ESG and market performance, comparing between Islamic and conventional banks in emerging markets. It also helps understanding the significant role played by Sharia governance structure in improving the association among these variables.
Tumewang et al. (2026) studied this question.