Relationship of banking sector and environmental performance in Turkey

Abstract

Purpose- With the global financial crisis in 2008, financial institutions have brought up the importance of the evaluation of the relationship between the environment and financial performance and its role in its development. In particular, examining the effects of environmental policies on the factors such as financial development, economic growth and financial performance is among the research subjects of researchers. In this respect, the aim of this study is to examine the relationship between the financial performance of the banking sector and environmental performance in Turkey. Methodology- While examining the effect of environmental performance on the financial performance of the banking sector, annual data for the period between 1990-2019 have been used, and short- and long-term relationships between the variables have been established by the ARDL bound test and the causality relationship has been established by the Toda-Yamamoto causality test. Return on assets (ROA) has been used as the financial performance indicator of the banking sector and carbon dioxide emission (CO2) as the environmental performance indicator in the study. In addition, deposits, loans and liquid assets have been used as control variables in the study. Findings- In the model established with the ARDL cointegration test in the study, it has been first investigated whether the variables are cointegrated in the long-term, and it has been concluded that the variables are cointegrated in the long-term. In the established ARDL model, it has been determined that carbon dioxide emissions have a positive effect on the financial performance of the banking sector in the long-term, but not in the short-term. In addition, it has been determined that deposits and liquid assets, the control variables, have a positive effect on financial performance both in the short- and long-term, while loans do not have any effect. The findings from the results of the Toda-Yamamoto causality test reveal a one-way positive causality relationship from carbon dioxide emissions and deposits to banking financial performance. Moreover, while a positive two-way causality relationship has been established between financial performance and liquid assets, no causality relationship has been found with loans. Conclusion- The results of the cointegration test and the causality test confirm each other. The findings show that an increase in CO2 emissions will lead a positive effect on the financial performance of banks. Consequently, it is thought that developing countries such as Turkey are increasingly addicted to non-renewable energy consumption and adopt a more flexible environmental policy and so that they provide a higher financial performance. With this result, the opinion that the Pollution Paradise hypothesis is valid for Turkey is supported. Keywords: Financial performance, environmental performance, ARDL, Toda-Yamamoto JEL Codes: C32, G21, O13