Impact of Environmental, Social, and Governance (ESG) Practices on the Stability and Profitability of Financial Institutions in Malaysia

Abstract

This study examines how Environmental, Social, and Governance (ESG) activities affect the stability and profitability of Malaysian financial institutions, in light of the country's growing emphasis on sustainable finance. Using annual data from 2014 to 2024, the study focuses on three main objectives: assessing whether stronger ESG practices enhance financial stability, identifying the most influential ESG pillar among environmental, social, and governance components, and evaluating whether ESG performance affects profitability. This study employs random-effects panel regression with robust standard errors, yielding empirical evidence relevant to Malaysia’s dual banking landscape. The results show that stronger ESG performance raises the stability of financial institutions. Environmental practice shows a strong positive relationship with financial institutions' stability. The social scores show a negative relationship, while governance shows a positive one, but neither is statistically significant. Conversely, ESG performance does not appear to significantly affect short-term profitability. This result highlights the importance of incorporating ESG considerations into firms' operations to ensure long-term resilience, offering valuable insights for both regulators and financial institutions, and helping firms align sustainability with financial stability.