Environmental, Social, and Governance (ESG) Practices and Financial Stability: Evidence from Egyptian Banks

Abstract

This study investigates the relationship between environmental, social, and governance (ESG) practices and the financial stability of Egyptian banks. While the growing body of ESG literature generally suggests that sustainability enhances institutional resilience, empirical evidence remains mixed, particularly in emerging banking markets characterized by macroeconomic volatility and evolving regulatory frameworks. Egypt provides a relevant empirical setting owing to its recent banking reforms, increasing emphasis on sustainable finance, and significant exchange-rate fluctuations during the study period. Using a balanced panel dataset of 12 Egyptian banks covering the period 2015–2024 (120 bank-year observations), the study estimates four separate panel-data models to examine the effects of the aggregate ESG index and its environmental (E), social (S), and governance (G) dimensions on financial stability, measured by the Z-score. Separate model specifications are employed to avoid multicollinearity between the composite ESG index and its constituent dimensions. Bank size and the exchange rate are included as control variables. Model selection is based on conventional panel-data specification tests, while statistical inference relies on bank-clustered robust standard errors following comprehensive diagnostic testing. The robustness of the findings is further evaluated using the Correlated Random Effects (CRE–Mundlak) approach. The empirical results indicate that overall ESG performance is positively and significantly associated with bank financial stability. Among the individual sustainability dimensions, the environmental pillar exhibits the strongest positive effect, governance demonstrates a weaker but statistically significant contribution, whereas the social dimension does not exert a statistically significant contemporaneous influence. Bank size is consistently associated with lower financial stability, while exchange-rate movements display a positive and significant relationship with bank stability throughout the estimated models. Robustness analyses confirm that these findings remain stable across alternative model specifications. The findings offer practical insights for banks, regulators, and policymakers seeking to strengthen financial stability through sustainability-oriented strategies.