The Impact of ESG Performance on Bank Profit Efficiency: An Analysis within Europe
This study investigates the impact of Environmental, Social, and Governance (ESG) performance on the profit efficiency of banks in the European Union between 2014 and 2024. Using a stochastic frontier analysis based on a Cobb-Douglas profit function, we assess whether ESG integration enhances banks’ ability to maximize profits given their input-output structures and market constraints. Our results show that ESG performance significantly enhances bank profit efficiency. This finding is robust across multiple model specifications and controlling for potential endogeneity concerns. Furthermore, we find the same relationship of the environmental pillar, while no significant effect was shown of the social and governance pillars. The study contributes to the literature by offering evidence in support of the Resource-Based View, and has practical implications for banks and regulators exploring Europe’s evolving sustainability framework.