Examining the Quadratic Impact of Sovereign Environmental, Social, and Governance Practices on Firms’ Profitability: New Insights from the Financial Industry in Gulf Cooperation Council Countries

Seyed Alireza Athari (), Chafic Saliba, Elsa Abboud and Nourhan El-Bayaa
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Seyed Alireza Athari: Department of Business Administration, Faculty of Economics and Administrative Sciences, Cyprus International University, Nicosia 99258, Turkey
Chafic Saliba: Business School, Holy Spirit University of Kaslik, Kaslik, Jounieh P.O. Box 446, Lebanon
Elsa Abboud: Human Resource Management, American University of the Middle East, Egaila 54200, Kuwait
Nourhan El-Bayaa: Department of Management and Entrepreneurship, Holy Spirit University of Kaslik, Kaslik, Jounieh P.O. Box 446, Lebanon

Sustainability, 2024, vol. 16, issue 7, 1-26

Abstract: The present study particularly aims to probe the quadratic effects of the combined and individual sovereign environmental, social, and governance (ESG) activities on the banking sector’s profitability. Furthermore, we attempt to shed light on the channels through which sovereign ESG practices impact the banking sector’s profitability. Unlike the vast majority of prior works that investigated the sustainability practice–firms’ profitability nexus from the firm level, this study originally probes this relationship from the country level by considering the sovereign ESG sustainability activities. To attain this purpose, we focus on banking sectors operating in Gulf Cooperation Council (GCC) economies and employ the panel-fixed effects and panel-corrected standard errors approaches between 2000 and 2022. Remarkably, the findings uncover that the nexus between combined sovereign ESG and profitability is a non-linear and inversed U-shape (concave), implying that investing in sovereign ESG enhances the banking sector’s profitability. However, after exceeding an inflection point (0.349), its effect turns out to be negative and it develops into activities of destruction. Furthermore, the findings underscore that the association between individual sovereign environmental responsibility and the banking sector’s profitability is a non-linear U-shape (convex), while an inversed U-shaped (concave) nexus is uncovered for the individual sovereign social and governance activities. Moreover, the significant non-linear inverted U-shape for the combined sovereign ESG–stability nexus corroborates that financial stability is a channel through which sovereign ESG significantly impacts profitability.

Keywords: sovereign ESG; profitability of the banking sector; Gulf Cooperation Council; emerging economies (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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