Does ESG reporting truly align with carbon performance? New evidence from the dual banking sector in emerging markets

Purpose — This study examines the Islamic banking industry’s commitment to ESG (environmental, social and governance principles) in selected countries by assessing it from the maqāṣid al-Sharīʿah (objectives of Islamic law) pyramid perspective. Design/Methodology/Approach — A rigorous quantitative study was conducted using the REFINITIV database, which covered 12 countries from 2020 to 2024, resulting in 497 observations. Findings — The study finds statistically significant evidence that the Islamic banking industry sets a high standard of ESG for Islamic banks to comply with at the country level. In the long run, the rate of commitment of the Islamic banking industry to each component of the ESG score is explained by the industrial environmental index score (7.21%), the social index score (25.43%), and the governance index (17.98%), respectively. This parameter provides information about the proportion of the ESG score to which there is a greater commitment than for the others. This suggests that the Islamic banking industry pays more attention to the social index score, followed by governance and the environment. It can therefore be deduced that the Islamic banking industry pays substantial attention to the social aspects as ḍarūriyāt (essentials), followed by strengthening governance factors as ḥājiyyāt (needs) and the environmental factor as taḥsīniyyāt (embellishments). On average, the commitment of Islamic banks to ESG at the country level is statistically significant (49.73%). However, there is still scope for Islamic banks at the country level to increase their commitment. Since ESG commitment varies among Islamic banks, the number of Islamic banks with low ESG commitment contributes to the average being driven down. Therefore, the Islamic banking industry is expected to have a standardised industry benchmark for each ESG component and the combined ESG. Originality/Value — This study adds value to the body of knowledge by exploring the Islamic banking industry’s commitment to ESG through the three levels of maqāṣid al-Sharīʿah—a first in this area that is not found in previous studies on ESG. Research Limitations/Implications — The availability of data imposed certain constraints on including more countries beyond the selected Muslim nations. Nonetheless, the findings offer valuable insights for Islamic banks in countries not covered in this study. Practical Implications — This study provides Islamic banks with a clear understanding of the extent of their contributions to ESG within the framework of maqāṣid al-Sharīʿah. Therefore, each Islamic bank could re-strategise its approach as necessary. Social Implications — These findings present Islamic banks with the opportunity to examine the environment in which they operate and adhere to the most essential aspects of maqāṣid al-Sharīʿah that are pertinent to that location, thus making their contribution significant to the local community.

Purpose This study aims to investigate the impact of gender diversity in top management teams and boards on environmental, social and governance (ESG) performance. The authors propose a corporate social responsibility (CSR) committee as a moderating variable in this relationship, drawing on resource dependence and legitimacy theories. This study is crucial in understanding the dynamics of gender diversity and its impact on ESG performance in the banking sector. Design/methodology/approach The study examines a sample of Islamic and conventional banks from 10 Middle Eastern and North African countries during 2008–2022. Initial analysis was conducted using fixed effects panel regression, whereas the robustness test used the generalized method of movement dynamic system. Findings The findings, which are significant for both conventional and Islamic banks, indicate that female directors are crucial in promoting ESG performance in conventional banks. In contrast, female executives do not appear to contribute significantly. However, for Islamic banks, neither board nor executive gender diversity significantly affects ESG performance. Moreover, the find that the positive moderating role of the CSR committee is significant only for the nexus between board gender diversity and conventional banks’ ESG performance and for the connection between executive gender diversity and Islamic banks’ ESG performance. Originality/value Despite the widespread belief that gender diversity in top management teams is pivotal in promoting ESG performance, empirical studies supporting these claims are scarce, particularly in the banking sector. The study, therefore, brings a novel perspective to this discourse. These findings have the potential to significantly assist stakeholders in evaluating how gender diversity in top management teams influences banks’ sustainability practices, thereby empowering them to make more informed and impactful investment decisions.

Currently, businesses are very vulnerable and exposed to the uncertainty that may cause damage to the company. With the ongoing pandemic issue, companies are more concerned about their performance and survival. Companies like banks play a crucial role in the economy since its growth depends on its financial sector's stability regardless of the country. Thus, companies have many approaches and strategies to maintain their business and stay relevant in the corporate world; hence, ESG disclosure comes in handy. According to the Bursa Malaysia Sustainability Reporting Guide (2018), ESG which stands for "Environmental, Social, and Governance" is a term used extensively, specifically by the investment community, portraying the environmental, social, and governance matters considered by investors in the corporate behaviour context. Experts have actively discussed ESG disclosure to address such reporting to enhance the company's performance portfolio. Furthermore, the ESG factor becomes one of the primary considerations for the investors' decision. ESG factor influences and strengthens the investors' confidence towards the company's performance. Bukhari, Hashim and Amran (2020) suggested that companies providing ESG disclosure show improvement in their financial performance. Experts found a significant impact of sustainability practices on the Islamic banks' financial performance (Jan, Marimuthu & Isa, 2019). Companies' ESG disclosure performance has established a reputation for playing a significant role in financial transparency and how it varies by economic and stakeholder's perspective (Oncioiu, Popescu, Aviana, Serban, Rotaru, Petrescu & Pantelescu, 2020). Jan et al. (2019) found that there is still a low adoption level of sustainability practices and reporting in the Islamic banking industry. An empirical study conducted by Nobanee and Ellili (2016) also stated that sustainability disclosure has an insignificant effect on Islamic banks than the high degree of such disclosure on conventional banks. Moreover, from a study conducted in seven Muslim countries, the sustainability practices and reporting were not of serious concern to those countries' Islamic banks (Hassan and Syafri Harahap, 2010). Keywords: Environment, Social, Governance (ESG) Disclosure, Islamic Banks, and Financial Performance.

Purpose This study examines the mediating role of board gender diversity in the relationship between environmental, social and governance (ESG) performance and bank risk-taking within the Gulf Cooperation Council (GCC) region. It aims to assess whether inclusive leadership enhances the effectiveness of ESG initiatives in promoting financial stability across Islamic and conventional banking systems. Design/methodology/approach Using a panel dataset of 56 GCC banks from 2015 to 2022, the research applies the Baron and Kenny (1986) mediation framework, alongside generalized method of moments (GMM) regressions and structural equation modeling (SEM). The analysis examines ESG scores, gender diversity metrics, and risk indicators (Z-scores and credit risk), controlling for firm-specific and macroeconomic factors. Findings The results show that strong ESG performance significantly lowers both insolvency and credit risk. Additionally, ESG engagement correlates positively with board gender diversity, and gender-diverse boards are linked to reduced risk-taking and partially mediate the ESG-risk relationship. This pattern holds for both Islamic and conventional banks. Practical implications The findings support policy reforms that integrate ESG and promote gender diversity in banking governance, thereby reducing risk exposure and improving financial resilience. Social implications By emphasizing women's leadership, this research aligns with broader societal goals of equity and inclusion, and shows how sustainability and diversity initiatives can foster inclusive governance cultures in the GCC region. Originality/value This study provides unique empirical insights from a region with distinct institutional and cultural contexts. It positions board gender diversity as a functional governance mechanism that effectively translates ESG commitments into risk mitigation strategies, enriching the theoretical discourse on ESG and inclusive leadership.

Purpose This paper aims to explore how ownership structure impacts environmental, social and governance (ESG) performance in banks, with a particular focus on Islamic banks. It also assesses whether bank risk and board characteristics influence the relationship between ownership structure and ESG performance. Design/methodology/approach This study analyzes a sample of 48 commercial banks from the Gulf Cooperation Council (GCC) countries over the period from 2013 to 2022. The primary empirical methodologies used are structural equation modeling and the generalized least squares technique. To ensure the robustness of the findings, alternative methodologies, including the two-stage least squares technique and the two-step system generalized method of moments approach, as well as various measures for ESG, bank risk and ownership structure, are also used. Findings The empirical findings reveal a negative relationship between ownership concentration and ESG performance, while institutional and foreign ownership positively contributes to ESG performance. This relationship is mediated by the bank’s risk attitude and moderated by board characteristics. Additionally, a significant difference is observed between conventional and Islamic banks, as well as based on bank size and the level of ESG performance. Practical implications Regulators should enforce ownership diversity rules (e.g. shareholding caps, tax incentives) and mandate Sharia-aligned ESG disclosures and governance audits; bank managers must embed ESG risk assessments, internal sustainability audits, strengthened board independence and diversity, plus targeted sustainable finance training; and investors need to integrate standardized ESG ratings (MSCI, Sustainalytics) into their analyses and engage proactively with both conventional and Islamic banks to drive faith-compliant sustainability initiatives. Social implications Enhanced ESG performance across GCC banks will mobilize capital toward environmentally and socially responsible projects, support SMEs and reinforce regional economic stability. By elevating transparency and governance, especially within Islamic banking frameworks, the region’s financial institutions will attract responsible international investment, bolster their global reputation and contribute to more inclusive, resilient growth and broader social welfare. Originality/value Given the limited research on this topic, this paper initiates a discussion on the impact of ownership structure on ESG performance in GCC countries. Using a substantial sample of both conventional and Islamic banks, the study emphasizes the significance of bank risk and board characteristics, which should be considered when implementing ESG investments and practices.

This study examines the differences in sustainability performance between Islamic and conventional banks in Indonesia using ESG (Environmental, Social, and Governance) scores as the leading indicator. The sample used was banking companies listed on the Indonesia Stock Exchange from 2022–2023, selected through purposive sampling. The analysis method used is multiple linear regression with dummy variables to differentiate between Islamic and conventional banks and Return on Assets (ROA) as a control variable. The analysis results indicate that Islamic banks have significantly lower ESG scores than conventional banks despite having higher financial performance (ROA). These findings suggest that sustainability values in Sharia principles have not been fully implemented in ESG practices. Based on Sustainability Theory and Stakeholder Theory, Islamic banks need to expand their sustainability focus beyond compliance with sharia law to include social responsibility, corporate governance, and environmental impact. This study contributes to developing ESG literature in the Islamic finance sector and provides insights for regulators and industry players in promoting more sustainable Islamic banking.

Purpose — This study aims to investigate the non-linear relationship between environmental, social and governance (ESG) practices and stock returns on the Malaysian stock exchange, and to examine how Sharīʿah compliance moderates the threshold effects of ESG and its subcomponents. Design/Methodology/Approach — This study examines data from 45 publicly traded firms on Bursa Malaysia for the period 2014–2023 using a dynamic panel threshold regression model. Findings — The results indicate an inverted U-shaped relationship between ESG ratings and stock returns, suggesting that modest levels of ESG participation enhance financial success, while excessive efforts beyond a certain threshold lead to either declining or negative returns. Under optimal impact, disaggregated ESG components, notably environmental (E), social (S), and governance (G) variables, show different thresholds, with environmental activities having the largest positive effect below their tipping point. Especially for companies with high-ESG commitment, the relationship between Sharīʿah compliance and ESG magnifies these impacts, hence highlighting the complementary character of ethical investing approaches. Originality/Value — This study contributes to the expanding body of research examining the relationship between ESG and stock returns by exploring how ESG can be integrated with Islamic finance. Specifically, it looks at how Sharīʿah might affect the link between ESG and stock returns, which is an area that remains underexplored. It is expected that this study will provide market participants with relevant information about the prospects and effects of combining ESG and Sharīʿah compliance in Islamic finance. Research Limitations/Implications — The application of self-reported ESG information is vulnerable to biases, as firms may engage in ‘greenwashing’. Practical Implications — Practically, the study emphasises the possibility of double screening—combining ESG criteria with Islamic ethical guidelines—as a strong foundation for sustainable investment and provides actionable information for investors trying to maximise portfolio returns via ESG integration.

This paper examines the impact of ESG (Environmental, Social, and Governance) factors on the stability of banks across different continents, focusing on both conventional and Islamic banking institutions. The empirical analysis indicates a positive influence of ESG activities on the stability of these financial institutions. Notably, the study finds that ESG scores significantly enhance the stability of both conventional and Islamic banks. The environmental pillar score, especially within the conventional banking sector, shows highly positive and statistically significant results, highlighting the benefits of environmentally responsible practices. In contrast, the social pillar is positively correlated with stability in the Islamic banking sector, suggesting that active involvement in community service and social responsibility initiatives leads to improved stability. Overall, the study emphasizes the transformative potential of ESG activities in enhancing the stability and valuation of banks by positively influencing both their external perception and internal operations.

PurposeThe banking sector is undergoing a phase of transition worldwide. The degrees of flux may vary from country to country. Metamorphosis causes include financial distress, corporate governance issues, environmental and social issues and an avalanche of technological advancements. This study aims to explore how environmental, social and governance (ESG), one of the essential and contemporary change agents across the sectors, including in the banks, impacts the valuation of the banking sector. In addition, this study also aims at how another vital and inevitable change agent, information and communications technology (ICT) expenses, influence the ESG’s impact on bank valuation.Design/methodology/approachPanel data regression is conducted using valuation (Tobin’s Q and market capitalization) as endogenous variables, and ESG and expenditure on ICT are used as the main exogenous variables. The interaction term of ESG and ICT is also used as an exogenous variable.FindingsSurprisingly, the authors find unequivocal evidence of the positive influence of ESG and ICT on bank valuation without consideration of ICT. In addition, ICT is also found to moderate the ESG’s influence on bank valuation positively. In particular, when ICT is low, an increase in ESG impacts the valuation negatively. However, high values of ICT cause ESG to impact the valuation positively.Research limitations/implicationsWithout consideration of ICT, ESG investments coincide with the value-creating hypothesis. However, modern world firms do not have a choice of ignoring ICT, which is essential to sustain. Adequate investments in ICT shift the value-eroding ESG effects (at low ICT) toward a value-creating hypothesis (at high ICT) when ESG investments start to impact the value positively.Practical implicationsIn practice, modern-day firms have no choice but to align with ESG investments. In cases where ESG tends to erode value (at low ICT), the firms should, in parallel, choose to make some ICT investments. Such combined and balanced attention to ICT, along with ESG, will undoubtedly benefit the firms financially.Originality/valueThe study’s significant implications are on the stakeholders’ mindsets, who may not have clarity on the role of ESG and ICT in the bank’s performance and subsequent valuation. The policymakers may also restructure their long-term policy on ESG in the banking sector using the current study’s findings.

PurposeThis study aims to investigate whether banks’ environmental, social and governance (ESG) activities impact their profitability and stability. The authors also explore whether banking industry competition and the country’s regulatory quality moderate the impact of banks’ ESG on their profitability and stability.Design/methodology/approachThe sample includes data from 46 banks in 11 Organization of Islamic Countries (OIC) from 2010 to 2020. The authors have used the generalized method of moments (GMM) as the primary estimation model, with robustness tests to validate research findings.FindingsThe results show that neither ESG nor its components impact bank profitability. Instead, ESG and its social component decrease bank stability. The findings neither support the stakeholder theory nor the risk-management view, which proposes that ESG activities improve financial performance and reduce unnecessary risks. However, an increase in market power (reduced competition) frees resources for banks, such that they focus more on ESG activities, which improves profitability, albeit at reduced stability levels. This finding supports the competition-related differentiation hypothesis. Finally, a country’s regulatory quality change does not influence bank ESG to impact its profitability or stability. This finding does not support the institutions-ESG proposition.Research limitations/implicationsThis study has several limitations. First, constrained by data availability, the authors could not examine Islamic banks in OIC countries. Examining the ESG outcomes in Islamic banks would be interesting based on Islamic ethics and corporate social responsibility perspectives. The data set could also be more recent so that the differential impact of COVID-19 on bank ESG and financial performance could be estimated. The coverage of OIC countries was limited in our sample; this could be improved in future research.Practical implicationsBanks should evaluate the focus and scope of their ESG activities, communicate their long-term strategic benefits with stakeholders and align ESG with their strategy and business model to offer innovative ESG-based products. They should also recalibrate ESG in their risk management framework to catalyse stability and stakeholders’ trust. Policymakers should control the level of competition so banks can foster ESG without sacrificing financial performance. Also, banks should be given regulatory incentives so ESG becomes integral to bank growth, direction and stability.Social implicationsESG should be part of banks’ strategy and business model, to maximize its benefits for stakeholders, while maintaining competition and providing regulatory incentives.Originality/valueTo the best of the authors’ knowledge, this is the first study to investigate the influence of bank ESG activities on their profitability and stability in OIC countries. The authors also extend the theoretical literature by connecting competition and regulatory quality to ESG-led financial performance.

PurposeThis paper aims to shed light on the risk structure in the presence of Islamic banking. The author concentrates on the relationship between Islamic banking and conventional banking in Turkey. Islamic banking and conventional banking are considered to be different kinds of sources for funding. Returns in the conventional banking are expected to be heavily influenced by the interest rate in the money market. However, Islamic banking returns are interest-free so that interest rate changes are not expected to affect the deposit returns in Islamic banks. Interest rates in the economy are a proxy to highlight the general risk level of the economy. By looking at the causal relationship between the deposit returns of both Islamic banks and conventional banks, it is possible to address the different types of banking in the general risk structure of the economy. This is one of the first studies to address the mentioned difference in banking sector in Turkish economy.Design/methodology/approachThis paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by means of Granger Causality. Also, Granger Causality test results will guide to explore the Islamic and conventional banking deposit return linkages. The author has extended the study with vector autoregressive analysis to understand the correlation structure between conventional deposit rates and the profit–loss sharing ratio of Islamic Banks. The author has also extended this study with impulse response functions to see whether the shocks hitting into the conventional banking affect Islamic banking and vice versa.FindingsThe results suggest that there is no significant clear relationship between both banking sectors. This result can be interpreted, as Islamic banks do not adjust their profit–loss sharing (PLS) ratios pegged to the interest rate offered by conventional banks. Also, conventional banks determine their interest rate without any connection to the Islamic banking PLS ratios. Overall results of this study contradict the findings of studies which conclude that Islamic banking might not be different from the conventional banking. It is reported that inferences from pair-wise Granger causality alone might be spurious, as the analysis based on non-stationary series can be a consequence of time functional characteristics of the time series.Social implicationsThe results can be taken as counter evidence to the hypothesis “Islamic banks determine their PLS ratios based on the interest rates offered by conventional banks”. This address that the Islamic banks may offer alternative financing methodology which has different procedure. Hence, Islamic finance can be taken as an alternative method with its asset-based healthier structure.Originality/valueThis is one of the first studies to address the Islamic versus interest-based banking difference in banking sector in Turkish economy. This paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by means of Granger causality.

Most boom-bust cycles witnessed across the world in recent decades have exposed several underlying factors that highlight the vulnerability of conventional banking, namely, high leveraging, wholesale financing, and utilization of complex instruments. Islamic financial institutions largely escaped the direct impact of the global financial crisis. In theory, Islamic banks are more resilient to shocks than conventional banks because ‘gharar’ considerations prohibit them from investing in excessively risky assets, as well as zero-sum betting on derivatives. Moreover, by promoting risk-sharing (as opposed to risk transfer) and endorsing investment in wealth-creating activities, the asset-based nature of Islamic financing naturally curbs excessive leverage. This paper investigates Does the Financing Model of Islamic Banks make them More Stable. For this, we proposed that the risk of fluctuation of the interest-based instrument (risk to banking sector stability) is counterbalanced by non-banking type movements through inventory changes thus making Islamic banking more stable. Specifically, we focused on three factors for comparison between Islamic and conventional banking systems, First factor was returns represented by ROA, ad ROE. The second was the stability, measured by volatility of returns. And the third factor was market risk represented by Beta. We hypothesized that the risk of the banking system is mainly due to interest rate movements. A sharp increase in interest rates would adversely affect the returns not only due to maturity mismatch problem but also due to increased loan loss provisions, taken because of higher chances to default. This makes the banking system more volatile and exposes it to systematic risk. Islamic banks on the other hand have mandatory involvement of underlying products in the lending transactions. This makes banks not only take exposure of those products on their balance sheet in form of inventory but also absorb their fluctuations in returns through mark to market adjustments. As these adjustments would no be highly correlating with interest-based earnings, as well as systematic risk, this would not only make total returns of Islamic banks more stable but also have less exposure to market risk. Since Islamic banks have a diverse earning base, the pure effect of inventory fluctuation was captured by Return of Financing product Inventory of Islamic Banks. Also, we explored the effect of different bank-specific factors on Returns (ROA, and ROE), stability (volatility of ROA, and ROE), and market risk (BETA), and how these factors affect conventional and Islamic banks differently. These included Loan ratio (LR), Asset growth (AG ), the logarithm of total assets (LogTA), the ratio of loan loss provision over assets (LLP), the ratio of equity to assets (EQA), Return of Financing product Inventory (FPI ), and FOCUS measures the degree of specialization/ diversification in a bank's earnings. Dataset of a total of 13 banks (9 Conventional and 4 Islamic banks) operating in Pakistan was collected, for the period from 2009 to 2018. Results were according to expectations. All three factors (returns, stability, and market risk) seem to have a significant difference in their means. Where Islamic banks seem to have higher and more stable returns (high ROA, with lower volatility of ROA and ROE). Pure inventory returns seem to have even lower volatility than both Islamic and conventional banks, supporting the claim that the effect of inventory portion in Islamic banks’ balance sheet makes them more stable. Islamic Banks also seem to have lower market risk (low Beta) as compared to conventional banks, presumably because of countercyclical inventory movements. The results of the regression suggested that size has a significant negative effect on ROE of both conventional and Islamic banks, size also seems to decrease the volatility of ROE in both types. Size also seems to decrease systematic risk in an Islamic bank. loan loss provision also seems to inversely affect ROE and its volatility, but interestingly, does not seem to affect Islamic banks. Capital adequacy also seems to affect the ROE of both Islamic and conventional banks but seems to provide stability in returns for Islamic banks as it has a negative effect on the volatility of both ROE and ROA. Asset growth also seems to be inversely affecting the volatility of ROA for the overall sample. Results also suggested that Diversification in a bank's earnings seems to improve ROA of conventional banks, whereas Financing product Inventory returns seem to be positively affecting the beta.

This article discusses the integration of ESG(Environmental, Social, and Governance) in the management control systemof Islamic banking. Islamic banking in Indonesiaintegrates the core values of Islamic economics throughout its services. Thismainly involves the prohibition of interest and other financial transactions that are consideredcontrary to Islamic principles. In addition, Islamic banking also hasa commitment to help the community and the environment. Therefore,ESG principles are naturally aligned with whatIslamic banking aims to achieve.This research uses the Systematic Literature Review(SLR) method with the PRISMA (Preferred Reporting Items forSystematic Reviews and Meta-Analyses) approach. The data population of this study consistsof 20 journals from 2021-2025 that focus on ESG in the management controlsystem. The results of this study show thatenvironmental, social, and governance (ESG) management practices have become an important element inmanagement control systems, particularly in the Islamic banking sector, over the lastdecade. From 2021 to 2024, there was a significant increasein publications discussing ESG in the context of Islamic banking, whichsuggests that ESG is in line with shariah maqāṣid principles and cansupport sustainable financial performance.

Purpose This study aims to explore the current trends in the literature about environmental, social and governance (ESG) practices within Islamic banking. It also seeks to identify research gaps and propose directions for future inquiry. Design/methodology/approach Using a bibliometric analysis, this study synthesises 753 articles from the Scopus database from 1988 to 2023. The analysis was conducted using the biblioshiny package in RStudio and VOSviewer. Findings It reveals an increasing trajectory in the volume of literature on ESG within Islamic banking, with Muslim-majority countries supported by robust regulatory frameworks leading the discourse. Emerging interest from Muslim-minority countries is also noted. This research delineates five principal research streams and proposes future investigative pathways, including the influence of institutional factors on Islamic banks’ ESG practices. Practical implications This study offers valuable insights for Islamic bank management and stakeholders, enhancing their comprehension of ESG practices’ current landscape. Additionally, it directs emerging scholars towards novel and pertinent research opportunities within this domain. Originality/value Amidst a growing body of work on ESG and Islamic banking, this study is, to the best of the authors’ knowledge, the first bibliometric review dedicated solely to ESG considerations in Islamic banks. It augments the extant literature by adopting a more stringent methodological approach and a rigid quality assessment.

PurposeThis study aims to investigate whether integrating environmental, social and governance (ESG) practices mediates the relationship between executive incentive compensation and the financial performance of Islamic and conventional banks in the Middle East and North Africa (MENA) region.Design/methodology/approachThis study used multiple regression models to analyze the effectiveness of ESG practices as a mediating variable in explaining the relationship between executive incentive compensation and banks’ financial performance between 2015 and 2021. The sample consisted of 57 Islamic and conventional banks operating in the MENA region, and the data were collected from the Thomson Reuters database (Data Stream).FindingsThis research paper showed the positive and significant mediating effect of the ESG practice on Banks’ financial performance. Thus, banks’ financial and stock market profitability is influenced by ESG information disclosure. This finding shows that taking ESG into account improves the relationship between executive incentive compensation and banks’ financial performance.Practical implicationsThe results may interest academic researchers, regulators and policymakers and would support stakeholders and decision-makers who wish to discover how executive incentive compensation affects financial performance in banks.Originality/valueThis study contributes to previous literature by studying the mediating effect of ESG practices on the relationship between executive incentive compensation and banks’ financial performance. Indeed, the originality of this research paper is justified by the scarcity of studies and, to the best of the authors’ knowledge, constitutes one of the first attempts to examine this relationship via a mediating variable, i.e. ESG.