Abstract
Environmental, social, and governance (ESG) practices have been used as non-financial indicators to measure bank performance worldwide in the last decade. The United Nations (UN) has specified 17 Sustainable Development Goals (SDGs) for the implementation of these ESG concepts. However, it remains unclear whether the costs of ESG have exceeded the benefits. The purpose of this study is to examine the impact of ESG on the cost efficiency of developed and developing Asian banks using a two-step approach comprising stochastic frontier analysis (SFA) and stochastic metafrontier analysis (SMF). The data sample from 2015 to 2018 is separated into two groups: 60 Asian developed economies and 85 developing economies. The results show that banks in the developed Asian economies become more cost-efficient through environmentally friendly activities. The banks in the developing Asian economies increase their cost efficiency by socially responsible activities and improved governance. Moreover, banks in the developed Asian economies outperformed those in the developing Asian economies in terms of technology gap ratio (TGR) and metafrontier cost efficiency (MCE). The results of this study benefit not only investors and bank managers but also the entire banking sector and the world economy.
Highlights
Financial institutions play an important role in national and international trade, and in the process of globalization
The purpose of this study is to examine the impact of ESG on the cost efficiency of developed and developing Asian banks using a two-step approach comprising stochastic frontier analysis (SFA) developed by Battese and Coelli [4] and stochastic metafrontier analysis (SMF) proposed by Huang et al [6]
We studied the impact of macroeconomic factors on bank efficiency and compared the technology gap ratio (TGR) and metafrontier cost efficiency (MCE) of the two groups of banks
Summary
Financial institutions play an important role in national and international trade, and in the process of globalization. Banks serve as intermediary institutions for intermediation, channeling funds from savers to borrowers to enable business developments and investments [1]. Financial institutions are crucial in the international markets because banks support companies in conducting international trade in which foreign exchange and letters of credit are often needed. Banks provide their customers with convenient and low-cost ways, such as an internet banking system, to pay and track funds [2]. Banks assist multinational firms in achieving foreign direct investments and listing their stocks in overseas countries, helping these corporations to expand globally
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