Does Environmental, Social, and Governance (ESG) Performance Improve Financial Institutions’ Efficiency? Evidence from China

Abstract

Nowadays, the call for sustainable development is becoming stronger in all countries of the world, and environmental, social, and governance (ESG) performance, as a vivid practice of this concept, has gradually received extensive attention from enterprises and investors. Financial institutions have an important position in the national economy as an important tool for the state to regulate the macroeconomy. Whether ESG performance can improve financial institutions’ efficiency is of key significance for boosting sustainable development. Based on data from China’s listed financial institutions from 2015 to 2021, this study aims to investigate the impact of ESG performance on financial institutions. The robust nonparametric boundary model and fixed-effects model are employed for analysis. The empirical results demonstrate that ESG performance and its sub-indicators of environmental performance and social responsibility performance can significantly enhance financial institutions’ efficiency. In particular, this effect is more pronounced in the securities industry and diversified financial industry, as well as in non-state and small-scale financial institutions. The results remain unchanged after a series of robustness tests. Furthermore, the mechanism tests indicate that ESG performance can enhance financial institutions’ efficiency by reducing downside risk and agency costs.

Keywords

• environmental, social, and governance (ESG) performance
• financial institutions’ efficiency
• downside risk
• agency costs