Impact of Environmental, Social, and Governance (ESG) Practices on the Stability and Profitability of Financial Institutions in Malaysia DOI: https://doi.org/10.33093/ijomfa.2026.7.2.9
Article Sidebar
Main Article Content
Abstract
This study examines how Environmental, Social, and Governance (ESG) activities affect the stability and profitability of Malaysian financial institutions, in light of the country's growing emphasis on sustainable finance. Using annual data from 2014 to 2024, the study focuses on three main objectives: assessing whether stronger ESG practices enhance financial stability, identifying the most influential ESG pillar among environmental, social, and governance components, and evaluating whether ESG performance affects profitability. This study employs random-effects panel regression with robust standard errors, yielding empirical evidence relevant to Malaysia’s dual banking landscape. The results show that stronger ESG performance raises the stability of financial institutions. Environmental practice shows a strong positive relationship with financial institutions' stability. The social scores show a negative relationship, while governance shows a positive one, but neither is statistically significant. Conversely, ESG performance does not appear to significantly affect short-term profitability. This result highlights the importance of incorporating ESG considerations into firms' operations to ensure long-term resilience, offering valuable insights for both regulators and financial institutions, and helping firms align sustainability with financial stability.
Article Details
References
Agnese, P., Morelli, D., & Rossi, F. (2024). ESG and bank profitability: The moderating role of country sustainability in developing and developed economies. AIMS International Journal of Geo-Economics, 9(1), 1-20.
Albuquerque, R., Koskinen, Y., Yang, S., & Zhang, C. (2020). Resiliency of environmental and social stocks: An analysis of the exogenous COVID-19 market crash. Review of Corporate Finance Studies, 9(3), 593–621. https://doi.org/10.1093/rcfs/cfaa011
Almulla, S., Albaity, M., & Hassan Al-Tamimi, H. A. H. (2025). The effects of ESG and institutional quality on financial stability: Evidence from GCC banks. International Journal of Economics and Financial Issues, 15(2), 309–326. https://doi.org/10.32479/ijefi.18152
Anis Idayu, N. A., & Razali, H. (2022). ESG reporting practices among Islamic banks: A global perspective. IIUM Law Journal. 10.31436/iiumlj.v30iS2.755
Ararat, M., Claessens, S., & Yurtoglu, B. B. (2021). Corporate governance in emerging markets: A selective review and an agenda for future research. Emerging Markets Review, 48, 100767 https://doi.org/10.1016/j.ememar.2020.100767
Au, A. K. M., Yang, Y. F., Wang, H., Chen, R. H., & Zheng, L. J. (2023). Mapping the landscape of ESG strategies: A bibliometric review and recommendations for future research. Sustainability, 15(24), 16592. https://doi.org/10.3390/su152416592
Bank Negara Malaysia [BNM]. (2024). Towards a greener financial system: Annual report 2024. Kuala Lumpur: Bank Negara Malaysia.
Bank Negara Malaysia. (2024). Financial stability review: Second half 2024. Kuala Lumpur: Bank Negara Malaysia.
Berg, F., Kölbel, J. F., & Rigobon, R. (2022). Aggregate confusion: The divergence of ESG ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033
Boyd, J. H., & Graham, S. L. (1986). Risk, regulation, and bank holding company expansion into nonbanking. Quarterly Review, 10(2), 2-17. https://doi.org/10.21034/qr.1021
Bressan, S. (2024). Does the environmental impact of banks affect their financial performance? Research Square. https://doi.org/10.21203/rs.3.rs-4011147/v1
Cantero-Saiz, M., Polizzi, S., & Scannella, E. (2024). ESG and asset quality in the banking industry: The moderating role of financial performance. Research in International Business and Finance, 69, 102221. https://doi.org/10.1016/j.ribaf.2024.102221
Chaieb, I., & Lu, L. Y. (2024). Sustainable investing home and abroad (Swiss Finance Institute Research Paper Series No. 24 71). Swiss Finance Institute.
Chiaramonte, L., Liu, H., Poli, F., & Zhou, M. (2016). How accurately can Z-score predict bank failure? Financial Markets, Institutions & Instruments, 25(5), 333–360. https://doi.org/10.1111/fmii.12086
Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A survey. Emerging Markets Review, 15, 1–33.
https://doi.org/10.1016/j.ememar.2012.03.002
Deda, G., Mehmeti, I., Tërstena, A., & Bislimi, F. (2025). Steering stability: Governance determinants and the banking business insight from southeastern European countries. Multidisciplinary Science Journal, 7(5). https://doi.org/10.31893/multiscience.2025254
Do, H. L., Ho, H. H., Mai, T. C., Nguyen, T. N., & Nguyen, T. S. (2024). Does ESG really matter to the bank’s stability in ASEAN countries? Cogent Economics and Finance, 12(1). https://doi.org/10.1080/23322039.2024.2420218
Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), 389–411.
https://doi.org/10.1016/j.jcorpfin.2012.01.005
Firmansyah, A. (2023). Investigating the effect of ESG disclosure on firm performance. Cogent Economics & Finance, 11(1), 2287923. https://doi.org/10.1080/23322039.2023.2287923
Fithria, A., & Darma, S. (2024). ESG and credit risk: Evidence from Indonesian and Malaysian banks. Jurnal REKSA: Rekayasa Keuangan, Syariah Dan Audit, 11(2), 193-205. https://doi.org/10.12928/JREKSA.V11I2.11252
Gonzalez-Ruiz, J. D., Ospina Patiño, C., & Marín-Rodríguez, N. J. (2024). The influence of environmental, social, and governance issues in the banking industry. Administrative Sciences, 14(7). https://doi.org/10.3390/admsci14070156
Idan, R., Imna, S., Amin, M., Abdul-Rahman, A., & Ghazali, F. (2023). Governance and Insolvency Risk in Banking: A Systematic Literature Review. Asian Journal of Accounting and Governance 21, 109-130. https://ejournal.ukm.my/ajac/article/view/63674/0
Indrasuci, A. W., & Rokhim, R. (2023). ESG performance and banking performance: A case study of Far East Asia. Indonesian Journal of Economics and Management 3(3) 522-534. https://doi.org/10.35313/ijem.v3i3.4915
Irsyad, M., Chairiyati, F., & Rachmadi, E. (2025). Do ESG performance improve bank stability: Comparative analysis Islamic vs conventional Bank. Jurnal Magister Ekonomi Syariah, 3(2 ) 80–87. https://doi.org/10.14421/jmes.2024.032-06
Jamil, N. N., & Tri Wahyuni, E. (2025). ESG score, board structure and financial performance: Evidence from Malaysia and Indonesia public listed companies. The Journal of Muamalat and Islamic Finance Research, 22(2), 14–26.
Li, X., Tripe, D. W. L., & Malone, C. B. (2017, January 20). Measuring Bank Risk: An Exploration of Z-Score. Papers.ssrn.com. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2823946
Liaqat, I., Floerani, J., & Naseer, M. M. (2025). ESG performance and bank stability: The role of national culture and formal institutions. Research in International Business and Finance, 81, 103214. https://doi.org/10.1016/j.ribaf.2025.103214
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. Journal of Finance, 72(4), 1785–1824. https://doi.org/10.1111/jofi.12505
Md Aris, N., et al. (2025). The Impact of Green Banking on the Financial Performance of Banks in Malaysia. UNIMAS Review of Accounting and Finance, 9(1), 20–36.
Monteiro, G. F. A., Varella Miranda, B., Rodrigues, V. P., & Macchione Saes, M. S. (2021). ESG: disentangling the governance pillar. RAUSP Management Journal 56(4), 482–487. https://doi.org/10.1108/RAUSP 06-2021-0121
Nik Azhar, N. A. S. (2023). Relationship between ESG disclosure and firm performance: Malaysian banking sector (Master’s thesis, Universiti Teknologi MARA, Kelantan). UiTM Institutional Repository. https://ir.uitm.edu.my/id/eprint/77753/
Pyka, I., Karkowska, R., & Nocon, A. (2025). ESG activities and their influence on commercial banks’ profitability and financial stability. Journal of Entrepreneurship, Management and Innovation, 21(4), 54–75. https://doi.org/10.7341/20252143
Radzi, S. H. M., Hamid, N. A., & Ismail, R. F. (2023). An Overview of Environmental, Social And Governance (Esg) And Company Performance. Proceedings of the International Conference in Technology, Humanities and Management (ICTHM 2023), 12-13 June, 2023, Istanbul, Turkey, 131, 1111–1122. https://doi.org/10.15405/epsbs.2023.11.90
S&P Global. (2022). S&P Global ESG scores methodology. https://www.spglobal.com/esg/documents/sp-global-esg-scores-methodology-2022.pdf
Saif-Alyousfi, A. Y. H., & Alshammari, T. R. (2025). Environmental Sustainability and Climate Change: An Emerging Concern in Banking Sectors. Sustainability (Switzerland), 17(3). https://doi.org/10.3390/su17031040
Sayani, A., & Kaplan, B. (2020). Comparing risk and performance for absolute and relative ESG scores an empirical analysis using MSCI ESG scores https://www.msci.com/documents/10199/a645d4ff-b83e-426a-4636-e6fb81bbc599
Shahrom, Z. R., & Kunhibava, N. S. (2023). Sustainable Finance: A study On Malaysia’s regulatory framework on sustainable banking and its implementation by selected Islamic banks In Malaysia in support of sustainable development goals. The Journal of Muamalat and Islamic Finance Research, 152–178. https://doi.org/10.33102/jmifr.520
Tanaka, Y. (2025). Sustainable banking: How financial institutions are adapting to ESG demands. Academy of Accounting and Financial Studies Journal, 29(1), 1-3.
Wan Masliza, W. M., & Wasiuzzaman, S. (2021). Environmental, Social and Governance (ESG) disclosure, competitive advantage and performance of firms in Malaysia. Cleaner Environmental Systems, 2. https://doi.org/10.1016/j.cesys.2021.100015
Yuan, D., Gazi, Md. A. I., Harymawan, I., Dhar, B. K., & Hossain, A. I. (2022). Profitability determining factors of banking sector: Panel data analysis of commercial banks in South Asian countries. Frontiers in Psychology, 13. https://doi.org/10.3389/fpsyg.2022.1000412S.N.S.I