ESG and bank stability in Gulf Cooperation Council countries: Empirical evidence from listed commercial banks

Abstract

Background: Environmental, social and governance (ESG) practices are increasingly integrated into banking. However, their effects on financial stability remain inconclusive, particularly in oil-dependent economies like those of the Gulf Cooperation Council (GCC) countries.
Aim: This study investigated the effect of ESG scores on bank stability in the GCC countries. It also evaluates the role of economic freedom and the coronavirus disease 2019 (COVID-19) pandemic in shaping this relationship.
Setting: The study focused on 40 listed commercial banks across six GCC countries, over the period 2018–2023.
Method: Using panel data, the study applied a two-step system generalised method of moment (GMM) estimator. Bank stability is proxied by the logarithm of the Z-score, while ESG performance is measured through aggregate and pillar-specific scores (environmental, social, governance) from Bloomberg.
Results: The results reveal a statistically significant negative effect of the ESG pillars on bank stability. For instance, a 1-point increase in the environmental score is expected to lead to a 0.003 decrease in bank stability. Moreover, higher levels of economic freedom are associated with increased bank stability. Similarly, bank size, inflation and economic growth are key favourable contributors to bank stability. Additional analysis reveals that COVID-19 had a damaging effect on bank stability.
Conclusion: ESG integration in GCC banks may reduce short-term stability because of high implementation costs. Economic and regulatory contexts significantly influence the ESG-stability link.
Contribution: This study provides context-specific evidence on ESG impacts in emerging markets, offering insights for policymakers and banking institutions in shaping long-term sustainable finance strategies.