Banking Stability and Sustainable Investment

Abstract

Sustainable investment has become a trending issue in the area of investment. Thus investors are seeking to invest in businesses that do not only focus on profit maximization but also take into consideration the environmental, social, and governance (ESG) impact of their economic activities. This is because climate change affects businesses adversely. According to the physical and transition risk theory, climate change brings about unexpected natural occurrences which environmentally and socially affect the well-being of the people as well as transmission of risk to financial sectors in the form of NPL which leads to financial instability. This has necessitated that all industries including the financial sector to incorporate ESG factors into their operations to allocate funds to promote sustainable development. The stability in the financial sector is an indication of economic growth in a country. Therefore, the roles performed by banks are of much concern to the government, policymakers, regulators, and citizens. This study assessed the impact of sustainable investment (ESG) on banking stability. Study data was obtained from the websites of the World Bank database and the Global financial development database for 155 countries for a period of 11 years from 2010 to 2020. Two econometric estimators were adopted; a two-step system GMM and a fixed effect model. The results from the system GMM model showed that at the global, bank-level performance indicators, financial structure variables, macroeconomic factors and sustainable investment (ESG) all have significant impacts on the stability of the banking sector. The results from the fixed effect model showed that bank-level performance, financial structure, macroeconomic and sustainable investment have impacts on banking stability in all continents except the Asian continent which have no impact from bank-level performance and macroeconomic factors, and for Europe and South America, no impacts were found for sustainable investment pillars. In all cases, the impacts depend on the proxy used for banking stability. The study therefore recommends that regulators, supervisors, and policymakers should consider the institutional structures and governance quality of the country when making their decision and require banks to be socially inclusivity and ensure good environmentally sustainable practices in their operational activities. The study further recommends that similar studies be replicated among the various bloc such as Middle East and North African(MENA) countries, Middle-Income Countries, Sub-Sahara Africa, etc