DOES ESG IMPACT BANKS’ PROFITABILITY AND COST OF CAPITAL? EVIDENCE FROM THE MIDDLE EAST

Abstract

Growing global concerns regarding Environmental, Social, and Governance (ESG) issues have compelled bank managers internationally to prioritise sustainability in environmental, social, and governance dimensions. However, for banks in the Middle East, the implications of such practices for profitability and the various elements of the cost of capital remain uncertain. This study examines the impact of ESG initiatives on both profitability and the cost of capital within Middle Eastern banks. To achieve this, a panel dataset of 54 banks, drawn from 11 countries, has been utilised over the period 2014–2023. The empirical assessment employs Ordinary Least Squares (OLS) and Generalised Method of Moments (GMM) estimators to enhance the robustness of the results. The outcomes indicate that ESG engagement is linked to reduced profitability and an increase in the cost of equity, implying that financial markets may interpret banks committed to ESG as carrying greater risk. Moreover, the evidence does not support the notion that ESG practices improve profitability or lessen the cost of capital, whether equity or debt, in the observed sample. These results have significant implications for both managers and policymakers, underscoring the need for banks and regulators in the region to carefully assess the strategic and financial impact of ESG adoption.