ESG impact on bank performance - Evidence from Nordic countries

Abstract

As in other industries, ESG and sustainability considerations continue to gain importance in the banking sector as well. Although stakeholders are demanding ever greater commitment from companies to promoting responsible business practices, it remains unclear to what extent ESG affects financial performance. For this reason, the financial performance perspective is particularly emphasized in the banking sector, where maintaining capital adequacy and profitability is critical. The Nordic countries, which can be seen as pioneers in sustainability alongside the rest of Europe, have, however, received relatively little attention on this topic.

The aim of the study is to identify the relationship between ESG and banks’ financial performance in Nordic countries. To achieve this objective, four different linear regression models are created to illustrate the relationship between banks’ financial performance and ESG. Financial performance is described as Tobin’s Q, ROA and ROE. Since Nordic banks constitute a relatively small sample compared to other geographic regions, a sample consisting of all European banks was examined in the second phase of the analysis to enhance the relevance of the results. The data covers the period from 2015 to 2025, and the banks’ performance and ESG scores are analyzed on an annual basis.

The results show a statistically significant and positive relationship between combined ESG score and the financial performance of Nordic banks, but only regarding ROA and ROE. However, a positive relationship between combined ESG score and all performance indicators, including Tobin’s Q, is observed among all European banks. The effects of ESG on banks’ financial performance are not observed to be stronger in the Nordic countries than across Europe. In line with previous studies, the results indicate that the relationship between ESG and banks’ financial performance may depend on whether ESG is analyzed as combined score or individual dimensions.