Does ESG Compliance Drive Commercial Banks Stock Returns? Evidence from the South African Market
Does ESG Compliance Drive Commercial Banks Stock Returns? Evidence from the South African Market

Summary/Abstract: Purpose: The study examined the effect of environmental, social and governance (ESG) on the commercial bank returns in South Africa.Design/Methodology/Approach: The study made use of a cross sectional panel model for the sample period 2015-2024. The dependent variable included five South African commercial banks (ABSA, Standard bank, Nedbank, Capitec Bank and Investec Bank) and the independent variable comprised of ESG ratings for each bank. The study also introduced control variables in the form of macroeconomic variables, namely, inflation, money supply, short-term interest rate, long-term interest rate, gross domestic product and real effective exchange rate.Findings: The findings demonstrate that commercial bank returns in South African is negatively affected by ESG compliance. Moreover, gross domestic product, short-term interest rate, long-term interest rate and real effective exchange rate has a positive effect on commercial bank returns.Practical Implications: Firstly, the prudent authority which governs the financial market must re-examine policies requiring South African commercial banks to be ESG compliant as it reduces the return perspective of each bank. Secondly, the Asset-Liability Committees (ALCO) of commercial banks should develop strategies that alters the mix of assets and liabilities to better manage the costs associated with ESG compliance. This way they can better manage the negative effect of ESG compliance on banks returns.Originality/Value: This study is the first to consider ESG compliance as a determinant of commercial bank returns in South Africa. Hence, the study provides insight into the effect between ESG compliance and commercial bank returns. It, therefore, contributes to emerging market literature which is centred on bank performance as appose to bank returns.Paper Type: Research Paper

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