This study examines the impact of environmental, social and governance (ESG) performance on European bank profitability and investigates whether the moderating role of green innovation complements or substitutes traditional ESG practices in enhancing financial performance.
Using a balanced panel dataset of 45 European listed banks from 2005 to 2023, we employ Generalized Least Squares estimation, quantile regression across performance distributions (25th, 50th, 75th percentiles), and Pooled Mean Group estimation to capture heterogeneous effects and distinguish long-run from short-run dynamics. Robustness tests include ESG pillar-specific analysis, alternative performance measures, crisis period analysis, and pre/post-Paris Agreement temporal analysis.
Results confirm a positive ESG-financial performance relationship but reveal that green innovation negatively moderates this effect, indicating substitution rather than complementarity. Both strategies individually enhance performance but compete for finite organizational resources. The substitution effect remains consistent across all ESG pillars and alternative performance measures (MTB, ROE, NIM). Quantile regression analysis reveals stronger moderation effects among high-performing banks, while dynamic estimation confirms significant long-run substitution with no short-run impacts. Temporal analysis demonstrates intensified substitution post-Paris Agreement when green innovation became increasingly important for bank performance.
These findings guide bank managers in optimizing resource allocation between ESG initiatives and green innovation projects, recognizing trade-offs rather than additive benefits. High-performing banks should prioritize strategic focus, while lower-performing institutions benefit from comprehensive ESG approaches. Policymakers should design regulatory frameworks that acknowledge substitution effects and avoid conflicting sustainability incentives.
This is the first study examining combined ESG-green innovation impacts on European bank performance, addressing a unique environment characterized by strict regulatory frameworks and heightened sustainability expectations.
