Using Environmental, Social, Governance (ESG) and Financial Indicators to Measure Bank Cost Efficiency in Asia

Hai-Yen Chang, Lien-Wen Liang and Yu-Luan Liu
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Hai-Yen Chang: Department of Banking & Finance, Chinese Culture University, Taipei City 11114, Taiwan
Lien-Wen Liang: Department of Banking & Finance, Chinese Culture University, Taipei City 11114, Taiwan
Yu-Luan Liu: Department of Banking & Finance, Chinese Culture University, Taipei City 11114, Taiwan

Sustainability, 2021, vol. 13, issue 20, 1-20

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.

Keywords: ESG; sustainable development goals (SDGs); bank efficiency; bank cost; stochastic frontier analysis; stochastic metafrontier analysis (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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