This paper examines whether annual transition (low-carbon) capital expenditure (ENV Capex) enhances bank performance and through which mechanisms in the U.S. banks, positing two mediators: credit-risk discipline, proxied by credit default swap (CDS) spreads, and sustainable intermediation, proxied by sustainability-linked lending (SLL) intensity. Grounded in the Resource-Based View, Stakeholder Theory, and Signaling Theory, ENV Capex is treated as a tangible capability whose value materializes when governance converts spending into credible, monitored targets that investors recognize.
Using an unbalanced panel of 113 banks from 2014 to 2023 assembled from Bloomberg ENV, Fundamentals, and Sustainable-Finance datasets, the study estimates a two-step System-GMM to address performance persistence, endogeneity, and unobserved heterogeneity, and evaluates mediation within a dynamic specification with bootstrap inference while modelling governance quality as a moderator of the ENV Capex–CDS relationship.
The results show a positive direct association between ENV Capex and market valuation (Tobin's Q), alongside economically meaningful indirect effects operating through both channels: higher ENV Capex is associated with narrower CDS spreads and greater SLL intensity, and both pathways are linked to higher valuation. Consistent patterns are also observed for accounting-based performance measures (ROA and ROE), indicating that the valuation effects are supported by realized profitability rather than market sentiment alone. Governance strengthens the risk-discipline pathway, suggesting that credible oversight is a precondition for markets to price the benefits of sustainability investment.
The paper contributes to the ESG and banking literature by identifying ENV Capex as a more specific bank-year measure of environmental investment than broad ESG proxies and by examining whether its association with performance is reflected through two finance-oriented channels, namely CDS-based risk discipline and SLL intensity. Methodologically, the study adds incremental value by applying a dynamic System-GMM mediation framework that accounts for persistence, endogeneity and unobserved heterogeneity, while interpreting the evidence cautiously as mechanism-consistent rather than definitively causal. For managers and supervisors, the findings highlight the importance of governance standards, KPI integrity and verifiable SLL design in strengthening credibility, limiting greenwashing concerns and linking measurable environmental investment to risk-adjusted value creation.
