The relationship between environmental, social and governance pillars and financial performance in the era of financial technology and Covid-19. The case of the banking industry

Abstract

We analyse the relationship between environmental, social and governance (ESG) pillars of sustainability and financial performance (FP) in the banking industry through evaluating profitability and market value. The indicator for profitability is return on assets (ROA) and for market value is Tobin’s Q. Furthermore, we examine two moderating effects to analyse (i) if the financial technology (Fintech) firms outperform traditional banks by participating in ESG activities, and (ii) the change of these relationships before and after the Covid-19 outbreak. The sample contains 697 firms, which includes banking and investment banking services in EU, US and Asia, and Fintech firms identified from the KBW and Nasdaq Fintech (KFTX) Indices and NASDAQ Insurance Index (IXIS) over a 4-year period (2017-2020). The analysis was performed using feasible generalised least square (FGLS). Our results show that depending on the measure of ESG pillar, a positive relationship between ESG performance and FP. Specifically, social scores have positive impact on the profitability whilst environmental scores have positive impact on the market value. Moreover, we find that the positive relationship between ESG and FP is stronger in Fintech firms. Similarly, the pandemic enhanced the positive influence of environmental scores on market value. However, the influence of social scores on market value turns into negative after pandemic. We also find that by involving in ESG activities Fintech firms can increase more market value than traditional banks, although this method may negatively affect their profitability after pandemic. We contribute to the sustainability literature in the financial industry. For academic implication, it is necessary to evaluate sustainability by three pillars rather than as a single construct unifying the three different pillars; for investor and practitioners, ESG is relevant to be consider as the non-financial indicators to assess the FP. In the future, we hope researchers could improve the limitation of the availability of post-pandemic data in this study.