The Moderating Effect of Size of the Bank on the Relationship Between Environmental, Social, and Governance (ESG) Practices and the Financial Performance of Listed Commercial Banks in Africa
DOI:
https://doi.org/10.70619/vol5iss11pp36-53-706Keywords:
Governance, Financial Performance, Return on Assets (ROA), Environmental, Social and Governance Practices (ESG)Abstract
This study investigated the moderating effect of bank size on the relationship between Environmental, Social, and Governance (ESG) practices and the financial performance of listed commercial banks in Africa. Panel data were collected for fifteen banks across South Africa, Egypt, and Morocco over ten years (2013–2022), with ESG pillar scores sourced from the London Stock Exchange Group database and financial performance proxied by Return on Assets (ROA). Using fixed effects regression with lagged ESG variables, bank size (log of total assets) was tested as a moderator, while a Covid-19 dummy captured 2020–2021 shocks. Results from the baseline moderation model show that Environmental Score (β = 0.0001823, p = 0.005) and Governance Score (β = 0.0001298, p < 0.001) had significant positive effects on ROA, while Social Score (β = 0.0000074, p = 0.629), bank size (β = 0.0003479, p = 0.216), and Covid-19 (β = –0.000534, p = 0.995) were insignificant. The model explained 56.1% of the variation in profitability (R² overall = 0.5608, F(5,130) = 15.41, Prob > F = 0.000). In the extended interaction model, environmental (β = 0.000202, p = 0.004) and governance (β = 0.000226, p < 0.001) effects remained significant, while social turned negative and insignificant (β = –0.000062, p = 0.131). Crucially, the governance × size interaction was significant and negative (β = –0.0000048, p = 0.003), suggesting that the profitability benefits of governance weaken in larger banks. Interactions involving environmental (β = –0.000003, p = 0.246) and social (β = 0.00000615, p = 0.079) were statistically insignificant. The interaction model explained 59.6% of profitability variation (R² overall = 0.5957, F (8,127) = 11.75, Prob > F = 0.000). The findings demonstrate that while environmental and governance practices consistently enhance financial performance, their effects are not uniform across bank sizes. Specifically, larger banks face diminishing governance-related gains, highlighting the importance of streamlining governance structures in large institutions and strengthening ESG disclosure standards across African markets.
References
Abisola, A. (2021). The nexus between bank size and financial performance: Does internal control adequacy matter? Unpublished PhD Thesis. Pan-Atlantic University, Lagos, Nigeria.
Atan, R., Alam, M.M., Said, J., & Zamri, M. (2018). The impacts of environmental, social, and governance factors on firm performance: Panel study of Malaysian companies. Management of Environmental Quality: An International Journal, 29(2), 182–194.
Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2020). Environmental, social, governance (ESG), and financial performance of European banks. Accounting and Management Information Systems, 19(3), 480–501. https://doi.org/10.24818/jamis.2020.03003
Bătae, O. M., Dragomir, V. D., & Feleagă, L. (2021). The relationship between environmental, social, and financial performance in the banking sector: A European study. Journal of Cleaner Production, 290, 125791. https://doi.org/10.1016/j.jclepro.2021.125791
Baltagi, B. H. (2024). Hausman’s specification test for panel data: Practical tips. In Essays in Honor of Subal Kumbhakar (Advances in Econometrics, Vol. 46, pp. 13–24). Emerald Publishing.
Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51(6), 1173–1182.
Berg, F., Fabisik, K., & Sautner, Z. (2021). Rewriting history II: The (un)predictable past of ESG ratings. European Corporate Governance Institute – Finance Working Paper No. 708/2020.
CBK. (2021). Commercial banks’ weighted average rates. Central Bank of Kenya. https://www.centralbank.go.ke/commercial-banks-weighted-average-rates/
Cornett, M. M., Erhemjamts, O., & Tehranian, H. (2016). Greed or good deeds: An examination of the relation between corporate social responsibility and the financial performance of US commercial banks around the financial crisis. Journal of Banking & Finance, 70, 137–159. https://doi.org/10.1016/j.jbankfin.2016.04.024
Deegan, C. (2002). Introduction: The legitimising effect of social and environmental disclosures – A theoretical foundation. Accounting, Auditing & Accountability Journal, 15(3), 282–311.
Dragomir, V. D., Bătae, O. M., Ionescu, B. S., & Feleagă, L. (2022). The influence of ESG factors on financial performance in the banking sector during the Covid-19 pandemic. Economic Computation and Economic Cybernetics Studies and Research, 56(4), 5–22.
Ersoy, E., Swiecka, B., Grima, S., & Özen, E. (2022). The impact of ESG scores on bank market value: Evidence from the U.S. banking industry. Sustainability, 14(15), 9527. https://doi.org/10.3390/su14159527
Gangi, F., Meles, A., D’Angelo, E., & Daniele, L. M. (2019). Sustainable corporate social responsibility development and corporate governance in the financial system: Are environmentally friendly banks less risky? Corporate Social Responsibility and Environmental Management, 26(3), 529–547. https://doi.org/10.1002/csr.1699
Gitagia, F., Wamugo, L., & Omagwa, J. (2020). Dividend decisions, economic growth and firm’s value of firms listed at Nairobi Securities Exchange, Kenya. Research Journal of Finance and Accounting, 11(18), 22–31.
Global Banking Annual Review. (2023). Global banking annual review 2023. McKinsey & Company. https://www.mckinsey.com/industries/financial-services/our-insights/global-banking-annual-review
Global Finance. (2023). Global news and insight for corporate financial professionals. https://gfmag.com/
Hedström, A., & Dahlsjö, E. (2023). ESG scores and financial performance – A comparison between China and Sweden. Jönköping International Business School, Master Thesis.
Hussein, K. (2010). Bank-level stability factors and consumer confidence: A comparative study of Islamic and conventional banks’ product mix. Journal of Financial Services Marketing, 15(3), 259–270.
Korkmaz, T., & Nur, T. (2023). The effect of ESG sustainability on firm performance: A view under size and age on BIST Bank Index firms. Journal of Research in Economics, Politics & Finance, 8(2), 208–223.
Kroes, J. R., & Manikas, A. S. (2014). Cash flow management and manufacturing firm financial performance: A longitudinal perspective. International Journal of Production Economics, 148, 37–50.
LSEG. (2023). London Stock Exchange Group ESG database. https://www.lseg.com
Maluki, P. (2021). Financing economic growth: The banking sector and its contribution to microeconomic stability in Kenya. Nanyang Technological University.
Mathuva, D. M., & Kiweu, J. M. (2016). Cooperative social and environmental disclosure and financial performance of savings and credit cooperatives in Kenya. Advances in Accounting, 35, 197–206.
McKinsey & Company. (2022). Banking on a sustainable path: Global banking annual review 2022. https://www.mckinsey.com/industries/financial-services/our-insights/global-banking-annual-review
Miralles-Quirós, M. M., Miralles-Quirós, J. L., & Hernández, J. R. (2019). ESG performance and shareholder value creation in the banking industry: International differences. Sustainability, 11(5), 1404. https://doi.org/10.3390/su11051404
Mumo, B. (2022). The effects of ESG reporting on stock returns of firms listed at the Nairobi Stock Exchange. Unpublished MBA Thesis, University of Nairobi.
Nodeh, F. N., Anvar, A. M., Ramakrishnan, S., & Rafinia, A. A. (2016). The effect of board structure on bank’s financial performance by moderating firm size. Mediterranean Journal of Social Sciences, 7(1), 253–263.
Osuji, A. A. (2023). Firm size as a moderator of the relationship between sustainability practices and organizational performance of banks. Unpublished PhD Thesis, Walden University, Minnesota.
PwC. (2022). Kenyan banking sector total tax contribution study. PricewaterhouseCoopers & Kenya Bankers Association. https://www.kba.co.ke/
PwC. (2023). An ESG for Africa? PricewaterhouseCoopers. https://afrique.pwc.com
Scholtens, B. (2009). Corporate social responsibility in the international banking industry. Journal of Business Ethics, 86(2), 159–175.
Shen, C.-H., Wu, M.-W., Chen, T.-H., & Fang, H. (2016). To engage or not to engage in corporate social responsibility: Empirical evidence from global banking sector. Economic Modelling, 55, 207–225.
Soana, M. G. (2024). Does ESG contracting align or compete with stakeholder interests? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4742744
Waddock, S. A., & Graves, S. M. (1997). The corporate social performance–financial performance link. Strategic Management Journal, 18(4), 303–319.
Xiao, C. (2018). Corporate social responsibility and firm performance: The moderating role of slack resources. Journal of Business Ethics, 150(1), 169–186.
Youssef, A., & Diab, A. (2021). The impact of corporate governance on financial performance: Evidence from Egypt. Journal of Accounting in Emerging Economies, 11(1), 60–83.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Isaac Muchiri Njuguna, Lucy Wamugo Mwangi, Fredrick Warui Waweru
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
