Zahid et al.

, Cogent Economics & Finance (2023), 11: 2183654

https://doi.org/10.1080/23322039.2023.2183654

FINANCIAL ECONOMICS | RESEARCH ARTICLE

The nexus of environmental, social, and
governance practices with the financial
performance of banks: A comparative analysis for
Received: 05 October 2022 the pre and COVID-19 periods
Accepted: 18 February 2023
Muhammad Zahid1*, Syeda Um-Ul-Baneen Naqvi1, Amin Jan2, Haseeb Ur Rahman3, and
*Corresponding author: Muhammad Said Wali4
Zahid, Management Sciences
Department, City University of
Science and Information Technology, Abstract: This study aims to examine the impact of ESG practices on the financial
Peshawar, Khyber Pakhtunkhwa, performance of the banking industry of Pakistan during the pre and COVID-19 per­
Pakistan
E-mail: zahid@cusit.edu.pk iods. The data were collected from the annual reports of selected banks for the pre-
Reviewing editor: COVID-19 period (2018) and the COVID-19 period (2020). Results of the t-test show
David McMillan, University of Stirling, that there is a significant difference in ESG disclosures between the pre and during-
UK
COVID-19 periods. The regression analysis shows that the formative ESG factor
Additional information is available at
the end of the article positively affected the financial performance of the banking industry during the pre-
COVID-19 period. While the reflective factors (environmental and social) positively
affected the financial performance of the banking industry in the pre-COVID
-19 period. During the COVID-19 period, the formative factor of ESG was found to
have a significant positive impact on the financial performance of the banking
industry. Similarly, in this period, the reflective factors (social and governance) were
also found to have a significant positive impact on the financial performance of the
banking industry. Interestingly, environmental sustainability negatively impacted
the financial performance during the COVID-19 period. It indicates that the banking
industry ignored environmental sustainability practices during the COVID −19 per­
iod, negatively affecting their financial performance. It suggests that ignoring
environmental sustainability practices will deteriorate financial performance fol­
lowing the COVID-19 period. These results have profound policy implications for
practitioners and policymakers in the banking industry, which are discussed.

Subjects: Environmental Economics; Finance; Business, Management and Accounting

Keywords: environmental; social; governance; disclosures; financial performance; COVID-19;

banking industry

1. Introduction
Over the past several years, corporate social and environmental responsibility has received enor­
mous attention in the banking industry. The advocates from this growing field proposed that
responsible investment is an investment approach that considers environmental, corporate social
responsibility, and corporate governance (Jan et al., 2022; Sjögren & Wickström, 2019).
Environmental, Social, and Governance (ESG) performance is a broad term for sustainable and
socially responsible corporate investments. Due to the increase in issues related to sustainability
and world climate change, ESG has become a substantial part of firm strategies and practices.

© 2023 The Author(s). This open access article is distributed under a Creative Commons
Attribution (CC-BY) 4.0 license.

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More significant numbers of firms now pay attention to sustainable investment as a part of their
mission and vision and compliance with Sustainable Development Goals (SDGs); Baah et al., 2021).
The COVID-19 pandemic impacted stakeholders, including shareholders, customers, and employ­
ees. The pandemic has caused a physical shock to the ecological system; it caused a social and
financial crisis in the form of a large number of deaths, social distancing policy, lockdown, and
business closure.

The COVID-19 pandemic is the first sustainability-related crisis of the 21st century. The unex­
pected impacts of the COVID-19 pandemic lead the firm to rethink its sustainability practices (ESG)
initiatives (Bogers et al., 2020). The descriptive approach of stakeholder theory argues that firms
are responsible for ensuring the interest of their heterogeneous group of stakeholders (McWilliams
et al., 2006). The firm that contributes to ESG initiatives will increase various stakeholders’ values
and ultimately increase shareholders’ wealth while at the same time contributing to sustainability
and social responsibility (Rehman et al., 2020). In the history of the global crisis, the worldwide
results from the COVID-19 pandemic are considered more important, and its effects on the ESG
activities could be more significant. Hence, during the COVID-19 pandemic, firms focus on ESG
initiatives to create their image in the eyes of stakeholders by behaving more socially responsible.
Similarly, such initiatives collectively ensure better firm value (Nirino et al., 2021). Corporate
governance practices play a pivotal role in corporate performance, the firm that has strong
corporate governance gets to benefit in the form of an increase in their financial performance
and stable future growth (Bhagat & Bolton, 2019). On the environmental front, the firm environ­
mental prevention practices improve the firm financial performance (Kalyar et al., 2019). Moreover,
the firm’s ESG practices safeguard the firm from stock price crash risk and adverse market
reactions (Wu & Hu, 2019). On the social front, it is anticipated that the firm contribution to social
activities is a driver of an increase in the firm market reputation and financial performance during
the time of the economic crisis such as COVID-19 (Qiu et al., 2021).

The banking industry is considered the backbone of financial and monetary growth and has
a twofold role in the sustainability of the country. The first role is (internal) which is to ensure ESG
practices in their internal business operations, and the second role is (external) which ensures the
disclosure of ESG practices in their credit and investment policies (Amina Buallay, Fadel, Alajmi
et al., 2020). Several studies in the banking sector show that ESG practices have significantly
influenced the financial performance of banks (Murè et al., 2021). Similarly, ESG and financial
performance of the banking industry are extensive, but studies that investigate the ESG practice on
financial performance in the context of the COVID-19 pandemic, especially in the banking industry,
are found to be scant, and hence requires further investigation (Fayaz et al., 2021; Ur Rehman
et al., 2020). Based on the above gap, there is a need to investigate the ESG practices trend in
banking sectors during the crisis of the COVID-19 pandemic and to check out the impact of ESG
practices on the financial performance of the banking industry for the pre and COVID-19 periods.

In the same vein, the main objectives of this research are first to investigate the trend of ESG
disclosures in the banking industry for the pre and COVID-19 periods. Secondly, to examine the
differences between the ESG disclosures of the banking industry for the pre and COVID-19 periods.
Finally, to investigate the impact of ESG disclosures on the financial performance of the banking
industry for the pre and COVID-19 periods.

Achieving the above objectives, this study contributes to the literature and practice in several
ways. Firstly, the study has a theoretical contribution by applying the stakeholder theory to the
relationship between ESG practices and financial performance using accounting measure i.e.
Tobin’s Q. Secondly, the study investigates the levels and impact of ESG practices on firm financial
performance in the Pakistani banking industry particularly in the pre and during crisis periods of
COVID-19. Thirdly, the study has theoretical significance by investigating the aforementioned
relationships in the developing countries context. Finally, the study has practical implications
and insights for the practitioners of banks, policymakers, regulatory bodies, and governments in

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making policies that incorporated sustainable, socially responsible, and environmental aspects,
particularly at the time of crises such as COVID-19.

This study is divided into the following sections. Section 1 is about the introduction. Section 2 is
about the literature review of the study. Section 3 is methodology. Section 4 discusses the results
and discussion. Section 5 presents the conclusion and future avenues.

2. Literature review

2.1. Conceptualization of the ESG disclosure

The phenomenon of Environmental, Social, and Governance (ESG) is now widely used in business
and financial markets. On a large scale, firms are trying to incorporate sustainable and socially
responsible practices with the ESG framework. It is an indicator of the firm’s non-financial perfor­
mance, firm management competencies, and risk management ability (Tarmuji et al., 2016). The
ESG evaluates the firm contribution to issues related to environmental, social, and governance. The
environmental factor evaluates a firm contribution to energy, natural resources protection, carbon
dioxide emission, water consumption, waste, and pollution. The corporate social factor includes
gender equality, employee health safety and protection, legal trade, and human right. While
corporate governance indicates the responsibility of management, leadership, corruption, money
laundering prevention, and reporting.

The concept of ESG began in late 1970 when the investors showed their interest in the disclosure
of the firm's social and environmental performance in company reports (Belkaoui & Karpik, 1989;
Neu et al., 1998; Wiseman, 1982). The second wave of ESG occurred in 2006 when the United
Nations Principle of Responsible Investment (PRI) highlighted the notion of environmental, social,
and governance practices and provided a framework that monitors investor decisions (Eccles &
Stroehle, 2018). The third concept highlighted by the GRI framework developed from the collabora­
tion of UNEP (United Nations Environmental Program) and CERE (Coalition for Environmentally
Responsible Economies) is based on environmental issues but the third generation (G3) of GRI
focuses on practices beyond environmental issues. The GRI framework covers six categories that
include economic, environmental, corporate social responsibility, human rights, and employee
safety. The GRI framework covers the corporate governance factor of ESG issues in its economic
category. The recent generation (G4) of GRI was issued in 2013 which is widely used by companies,
government, and regulatory bodies that establish standards for ESG practices and reporting.

2.2. Previous studies on ESG

Previous literature has found that ESG practices were rapidly explored (Alareeni & Hamdan, 2020).
Numerous studies have focused on the corporate financial performance of the company. Most of
the researchers considered only one factor of ESG such as environmental, corporate social respon­
sibility (CSR), or corporate governance. Most of these studies on ESG and corporate financial
performance only considered one factor among the three reflective factors of ESG (Barnett &
Robert, 2012). All three ESG factors are interconnected; therefore, neglecting any factor among
these factors will make it difficult to evaluate the actual connection between ESG practices and
firm financial performance. Based on the above confines, a study that considers ESG in all aspects
is needed (Alareeni & Hamdan, 2020).

2.3. The ESG practices in COVID perspectives

In the COVID pandemic, the sustainable (ESG) reporting standards and framework took a central
position in the annual reporting of firms (Adams & Abhayawansa, 2021). The researchers are
constantly exploring the importance of ESG and COVID-19. Díaz et al. (2021) argued that the ESG
components, i.e., social and environmental practices, had significant importance during COVID-19.
Several previous studies have focused on the COVID-19 pandemic’s downfall and ESG practices’
impact on firm value (Rubbaniy et al., 2022; Folger-Laronde et al., 2020; Takahashi & Yamada,
2021). Most of these studies found that ESG practice and firm performance are interrelated in the

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COVID-19 pandemic, and the firm with higher ESG practices had superior performance than a firm
with lower ESG practices. Prior studies only considered social and environmental factors among
ESG factors based on a few months of data collected from the period of COVID (Bae et al., 2021).
Those studies considered ESG factors beyond social practices and were based on the annual data
during COVID-19 and pre-COVID-19 period.

2.4. Theoretical framework

The firm’s ESG practice meets the need of various stakeholders more sustainably and responsibly,
the stakeholder theory purely supports this concept (Donaldson & Preston, 1995). The stakeholder
theory suggests that the key objective of the firm is to maximize the value for all stakeholders by
minimizing the damage they cause to society and the environment through its business opera­
tions. This theory considers the well-being of all stakeholders which include both primary stake­
holders (shareholders, employees, customers, and suppliers) that are directly connected with the
firm and the other secondary stakeholder that indirectly connect with the firm (Clarkson, 2016). If
the firm can meet the need of its various groups of stakeholders, it will be able to maximize its
overall corporate wealth (Crowther, 2008). The crux of the stakeholder theory also explains that
management of the firm is responsible for managing the overall stakeholder management with
respect to environmental, social, and governance dimensions. For the purpose, they are required to
manage the company during times of crises such as COVID-19. Moreover, previous studies also
applied the postulations of the stakeholder theory in similar nature of studies to test the hypoth­
eses (Chen & Yang, 2020; Folger-Laronde et al., 2022). Hence, the stakeholder theory fits the
theoretical base of the hypotheses in the upcoming sections. The theoretical framework depicts in
the conceptual framework as follows (see, Figure 1).

2.5. Research hypotheses development

The following section explains the development of the hypotheses.

2.5.1. ESG practices levels overtime

Attention is given to sustainability practices incorporating ESG practices (Jamil & Siddiqui, 2020).
The firm’s ESG disclosure in its annual reports with overall stakeholder interest ensures investor
perception and trust improvement. The stakeholder theory suggested that firms disclose their ESG
practices to stakeholders over time due to pressure from society, economic, environmental,
government, and ethical issues (Nirino et al., 2021). Also, it is found that ESG practices improve
in developing countries overtime because of improvements in public awareness, media interest,
investor pressure, legislation, economic rewards, and social awards and special events (Arayssi
et al., 2020; M. M. Zahid et al., 2019). The authors further noted that to follow policy and regulation,
all firms make more efforts to legitimize their operating processes. In this order, the firms disclose

Figure 1. Conceptual Note:

framework. H1a to H1c are related to the
(E) mean differences

Environmental
H2a and H3a

(S) Financial Performance

H2b and H3b
Social (Tobin’s Q)
H2c and H3c

(G) Control Variables

Governance Firm Size, Age, Leverage,
Lending and Lag of Tobin’Q

ESG Overall Score (H2 and H3)

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more ESG activities in their annual reports (Pedersen et al., 2020). However, as explained in the
following section, the pandemic situations such as COVID-19 may reduce the level of ESG practices
at the firm level. Furthermore, ESG practices may be reduced further in developing countries where
firms’ primary focus is to maximize the shareholders’ wealth rather than the stakeholders.

2.5.2. ESG practices for the pre and during COVID-19 period
The COVID pandemic refocused the interconnection between the planet, profit, and people,
particularly among climate change, health, and poverty in the global business environment. The
pandemic considers social practices as an essential practice among ESG and revalues the impor­
tance of the environment. The business world faces the delicacy of liquidity, labour health and
safety, market risk, and supply chain-related issues during COVID (Adams & Abhayawansa, 2021).
Furthermore, the increasing climate change during the COVID-19 pandemic further exposes the
firm’s vulnerability (Franklin, 2021). The researchers found a bond between the ecological crisis
and the rapid spread of new zoonotic coronavirus-infected diseases. Most of these studies deter­
mine that the COVID pandemic may quickly spread due to deforestation and increasing climate
change (Gibb et al., 2020). Most of these studies have found that firm-sustainable (ESG) practices in
the uncertainty and volatility of the COVID-19 pandemic look more productive. The previous study
analyzed the correlation between ESG and financial performance in the COVID-19 context. It is
analyzed that the firms contributing to social and environmental risk will be ready for any adverse
situation and react to them very well (Whieldon et al., 2020). Against the following background,
the following hypotheses are proposed.

H1: There is a significant difference in ESG disclosures of the banking industry of Pakistan for the pre
and COVID-19 periods.

H1a: There is a significant difference in environmental disclosures of the banking industry in Pakistan
for the pre and COVID-19 periods.

H1b: There is a significant difference in social disclosures of the banking industry in Pakistan for the
pre and COVID-19 periods.

H1c: There is a significant difference in governance disclosures of the banking industry in Pakistan for
the pre and COVID-19 periods.

H2: There is a significant positive impact of ESG disclosures on the financial performance of the
banking industry in Pakistan for the pre-COVID-19 period.

H2a: There is a significant positive impact of environmental disclosures on the financial performance
of the banking industry in Pakistan for the pre-COVID-19 period.

H2b: There is a significant positive impact of the social disclosures on the financial performance of
the banking industry in Pakistan during the pre-COVID-19 period.

H2c: There is a significant positive impact of the governance disclosures on the financial perfor­
mance of the banking industry in Pakistan for the pre-COVID-19 period.

H3: There is a significant positive impact of ESG disclosures on the financial performance of the
banking industry of Pakistan during the COVID-19 period.

H3a: There is a significant positive impact of the environmental disclosures on the financial perfor­
mance of the banking industry of Pakistan during the COVID-19 period.

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H3b: There is a significant positive impact of the social disclosures on the financial performance of
the banking industry of Pakistan during the COVID-19 period.

H3c: There is a significant positive impact of the governance disclosures on the financial perfor­
mance of the banking industry of Pakistan during the COVID-19 period.

2.5.3. Control variables

The firm size has been substantially used as a control variable in previous studies of ESG practices
(Drempetic et al., 2019). Previous studies illustrate that firm size positively affects the ESG practices
of the firm. The large size of the firm best consent to sustainability and ESG practices, the bigger
the firm size, the more it would contribute to environmental, social, and governance performance.
A reasonable concept behind this correlation is that the large size of the firm is under the perusal
of a huge number of stakeholders (Seroka-Stolka & Fijorek, 2020). Most prior studies found that the
age of the firm is also an essential element that affects firm ESG performance and considers
a control variable (Dissanayake et al., 2016). Correspondingly, these prior studies explore
a significant positive effect of firm age on ESG practices, as older businesses report containing
a huge part of their sustainable practices incorporated their contribution towards climate change,
biodiversity, social, and corporate behaviour issues (Kansal et al., 2014). Accordingly, empirical
studies found that the leverage ratio also affected ESG practices (Maskun, 2013). Also, these
studies analyzed that firm leverage positively affects the ESG practices of the firm. The prior
study analyzes that lending is also a control variable that significantly affects the ESG and
sustainable practices of the banks (Erwin et al., 2018).

3. Methodology
The population of the study consists of all banks registered with the State Bank of Pakistan (SBP).
There were total 24 banks registered on the SBP; however, due to the availability of data, total 19
banks were utilized as a sample for 03 years, i.e., year 2018 and year 2020, and hence, the study
utilized 57 annual reports for the final analysis. The study utilized a purposive sampling technique
to select the sample from the population. The period selected for the data collection is composed
of the pre-COVID period (2018–2019) and the year 2020 considered the (during COVID-19 period).
The data of this study are secondary that were collected from the annual reports of selected banks
through a content analysis approach. The data collection approach is explained in the next section.

3.1. Measurement of variables

The content analysis approach is used to collect quantitative data from annual reports regarding
ESG as per the dummy coding (Cantino et al., 2017). The ESG practices of this study are based on
an adapted index (Rehman et al., 2020; Muhammad; Zahid, Rehman et al., 2020). The ESG
practices index is based on two points: 1 for ESG reporting and 0 for no reporting. Higher scores
from the content analysis show higher ESG performance. The ESG was scaled on total 81 items
including 18 items of environmental, 51 of social, and 12 for governance, respectively. Based on
prior studies, this study uses Tobin’s Q ratio to measure bank performance (A. Buallay, 2019; Deng
& Cheng, 2019). Tobin’s Q is calculated as the value of the stock market divided by the value of
equity books. The control variables are leverage ratio, age, and bank size suggested by prior
literature (Shakil et al., 2019). The bank size control by taking the log of assets, firm age calculated
by business age measure, leverage ratio determined by dividing total debts by total equity, lending
controlled by the bank lending amount and lag of Tobin’s Q.

3.2. Model estimation

The descriptive statistics and the Pearson correlation test were used to test the validity of the data.
The independent-sample t-test was used to measure the change in levels of ESG disclosure for the
(pre and during) COVID-19 periods. The regression analysis through SPSS is used to determine the
ESG impact on the financial performance banking industry for the (pre and during) COVID-19 per­
iods. The econometric models for this study are as follows.

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FP ¼ α þ β1ES G it þβ2SIZ E it þβ3AG E it þβ4LEVERAG E it þβ5LENDIN G it þβ6LAGOFTOBIN0 SQ þ ε

(1)

FP ¼ α þ β1 E it þ þ β2 S it þβ3 G it þβ4SIZ E it þβ5AG E it þβ6LEVERAG E it þβ7LENDIN G it

þβ8LAGOFTOBIN0 SQ þ ε (2)

4. Results and discussion

4.1. Pre-regression test and results

The descriptive statistics with Kurtosis and Skewness show that some variables were not normally
distributed due to abnormal outliers; therefore, the data were normalized using the Van der
Waerden data distribution method. The normalized data with the kurtosis and Skewness shown
in Table 1 is ranging from +3 and the Skewness range +1.96 (De Lucia et al., 2020). The maximum
statistics and minimum statistics with the mean statistics are given in Table 1. The data were
collected from 57 annual reports of 19 banks for the (pre and during) COVID-19 period for the
years 2018 and 2020.

4.2. Descriptive statistics

Table 1 shows descriptive statistics for the dependent and independent variables from the given
sample of 57 annual reports of 19 banks registered with SBP over a data period of 02 years
including pre and during the COVID-19 period. The minimum and maximum values for Tobin’s
Q are 0.17 and 1.20 subsequently. The standard deviation is 0.14, while the mean statistics is 0.95.
It shows that the financial performance using Tobin’s Q ratio at a given period i.e. 2018 and 2020 is
stable. The minimum and maximum values for the ESG index are 30 and 74 subsequently. The
mean value of the ESG index is recorded at 57.28. The minimum statistic value, maximum statistic
value, and mean value of environmental disclosure are 1, 15, and 8.72, respectively. Table 1 further
shows that the minimum, maximum, and mean values for social disclosure are 21, 51, and 39.61,
respectively. The minimum, maximum, and mean values for governance disclosure are reported
with the values of 6, 11, and 8.95, respectively. Furthermore, Table 2 indicates that COVID-19
affected the overall disclosure values of ESG and its dimensions and reduced compared to the pre-
COVID-19 period. Neither company achieved the maximum ESG disclosures in both periods, a total
of 81.

The overall results of ESG disclosure from the banking industry show that in the given period the
banking industry is highly engaged in social practices compared to environmental and governance
practices. Results from Table 1 and 2 based on the controlled variables of the firm size of the bank
show the minimum, maximum, and mean values of 1.23, 38.49, and 10.04, respectively. These
results show that the banking industry has positively increased and expanded its assets in pre and
COVID-19 period. Similarly, the results of Table 1 show that the minimum, maximum, and standard
deviation values of the leverage ratio are 7.50, 23.97, and 4.53, respectively. These results show
that the banking industry is dependent on debts for the financing of its operations. The minimum
maximum and mean statistics for the controlled variable of lending are 1.00, 3.42, and 0.37,
respectively, which shows an increase in lending amount. Finally, the results in Table 1 based on
the firm age show that its minimum, maximum, and mean values are 8, 157, and 29.84, respec­
tively. It indicates that the banking industry is already operating for a decade and is mature
enough.

4.3. Pearson’s correlation matrix

The normal data were then processed through the Pearson correlation matrix test to check the
correlation among the predictors. If the correlation between the two predictors is found to be less
than 0.90, this is indicating that there is no problem with multicollinearity (Duque-Grisales &
Aguilera-Caracuel, 2019; Ur Rehman et al., 2020). Based on the above argument, Table 3 shows

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 Table 1. Descriptive statistics
N Min Max Mean S.D Skewness Kurtosis
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Variables Statistic Statistic Statistic Statistic Statistic Statistic S.E Statistic S.E
Tobin’s Q 57 .17 1.20 .95 .14 −2.91 .32 16.81 .62
Zahid et al., Cogent Economics & Finance (2023), 11: 2183654

ESG 57 30 74 57.28 9.70 −.85 .32 .79 .62

Environmental 57 1 15 8.72 3.61 −.69 .32 −.08 .62
Social 57 21 51 39.61 6.94 −1.02 .32 .71 .62
Governance 57 6 11 8.95 1.02 −.098 .32 .88 .62
Total Assets 57 1.23 38.49 10.04 8.87 1.56 .32 2.02 .62
Firm Age 57 8 157 29.8 32.64 3.25 .32 10.31 .62
Leverage 57 7.50 23.97 14.5 4.53 .25 .32 −1.07 .62
Lending 57 1.00 3.42 0.37 0.611 3.19 .32 11.92 .62

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 Table 2. Descriptive statistics (pre and during COVID-19)
Pre COVID-19 During COVID-19
https://doi.org/10.1080/23322039.2023.2183654

Variables Min Max Mean S.D Min Max Mean S.D

TobinsQ .170 1.199 .945 .160 .831 1.205 .964 .091
Zahid et al., Cogent Economics & Finance (2023), 11: 2183654

ESG 33.00 74.00 57.61 9.80 30.00 69.00 56.63 9.71

Environmental 1 15 9 4 1 14 8 3
Social 23 51 40 7 21 48 39 7
Governance 7 11 9 1 6 11 9 1
Total Assets 122.765 3227.132 937.405 845.622 158.996 3849.063 1138.540 974.940
Firm Age 8 156 29 33 10 157 31 33
Leverage 7.502 23.977 14.656 4.696 7.838 22.393 14.43 4.304
Lending 1.202 223.689 33.828 50.568 1.000 342.069 43.143 79.328

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 Table 3. Pearson’s correlation matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9)
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Tobin’s Q (1) 1
ESG (2) .243 1 .
Zahid et al., Cogent Economics & Finance (2023), 11: 2183654

Environmental .327* .790** 1

(3)
Social (4) .133 .924** .553** 1 .
Governance (5) .166 .376** .215 .236 1
Total Assets (6) .368** .660** .404** .650** .426** 1
Firm Age (7) .111 .251 −.150 .364** .166 .388** 1
Leverage (8) .528** −.002 .151 −.105 −.052 .008 −.148 1
Lending (9) .182 .242 .347** .126 .073 .387** .065 −.123 1
*.Correlation is significant at the 0.05 level (2-tailed).
**.Correlation is significant at the 0.01 level (2-tailed).

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Table 4. Group statistics

Std.
COVID-19 N Mean Deviation S.Error Mean
ESG Pre 19 56.8421 9.91779 2.27530
During 19 56.6316 9.70802 2.22717
Environmental Pre 19 8.16 4.180 .959
During 19 8.47 3.454 .792
Social Pre 19 39.74 7.117 1.633
During 19 39.26 7.007 1.607
Governance Pre 19 8.95 .848 .195
During 19 8.89 1.286 .295

that there is no multicollinearity problem detected in our data because the correlation between
two predictors was found to be equal to or less than 0.90. Moreover, the high correlation would not
be an issue if not correlated with the dependent variable (Tobin’s Q; Husted & Sousa-Filho, 2017).
Furthermore, the VIF values also show that multicollinearity did not affect the regression analysis
since all the values are below 5.0 (Hair et al., 2006) reported at the end of each regression
equations see, Table 6-9.

4.4. Difference in ESG disclosure levels between the Pre and during COVID-19 periods
The normalized data was further passed through an independent sample t-test to measure the
difference in ESG disclosure of the banking industry for the (pre and during) COVID-19 periods.

Table 4 shows pre and during COVID-19 group statistics with no significant changes.

Table 5 shows the t-test value for ESG is 0.066 with a p-value of 0.004 which is greater than the
significant value of 0.05. This result supports H1 of the study. The p-values of t-test for reflective
factors of ESG such as environmental, social, and governance are 0.08, 0.843, and 0.007, respec­
tively. Based on these results, H1a and H1c of the study are supported. Since the p-value for social
sustainability remained insignificant, hence it rejects H1b. These results are in

line with the first hypothesis of the study and underpinning theory which indicates a significant
change in ESG disclosure in the banking industry for the pre and during COVID-19 periods (Jamil &
Siddiqui, 2020; Nirino et al., 2021). Therefore, it is concluded that there is a significant change in
the reflective ESG disclosures of the banking industry for the (pre and during) COVID-19 periods (Ur
Rehman et al., 2020).

4.5. Regression results

The regression analysis in Table 6 explains the model summary on the formative as well as the
reflective dimensions of the ESG practices for the pre-COVID-19 period. The R2 indicates a 41%
variation in the dependent variable (Tobin’s Q) due to changes in independent variables. Table 6
based on the formative factor of ESG in terms of its p-value of 0.000 shows that the ESG practices
were positively affecting the financial performance of banks for the (pre-COVID-19 period), hence it
approves H2.

Results based on the reflective factor (E) environmental disclosure show that it has a significant
positive impact on the financial performance (Tobin’s Q) of the bank for the (pre-COVID-19) period,
i.e., p < 0.000. These results are in support of stakeholder theory which suggests that sustainable
business practices enhance the financial strength of firms. The results also align with previous
studies showing a positive impact of ESG on firm financial performance (Rahman et al., 2021;
Muhammad; Zahid, Rahman et al., 2020).

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 Table 5. Independent Sample t-test
t-test for Equality of Means
https://doi.org/10.1080/23322039.2023.2183654

95% Confidence Interval of the

Difference
Mean
Zahid et al., Cogent Economics & Finance (2023), 11: 2183654

t df Sig. (2-tailed) Difference S.E Difference Lower Upper

ESG Equal variances .066 36 .004** .210 3.183 −6.667 6.246
assumed
Equal variances −.066 35.984 .948 210 3.183 −6.667 6.246
not assumed
Environmental Equal variances .143 36 .008** .044 .307 −.579 .668
assumed
Equal variances .143 34.085 .887 .044 .307 −.581 .669
not assumed
Social Equal variances .200 36 .843 .061 .30 −.681 .558
assumed
Equal variances .200 35.943 .843 .061 .305 −.681 .558
not assumed
Governance Equal variances .181 36 .007** .053 .294 −.651 .544
assumed
Equal variances .181 32.625 .858 .053 .294 −.653 .547
not assumed
** p<.01, * p<.05

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Table 6. The nexus of ESG disclosure and firm performance for the (pre-COVID-19 Period)
Dependent
variable
Tobin’s Q
(Model
R2 = 0.407;
F = 3.429**) Coefficient Std. Error t-value p-value VIF
(Constant) −0.007 0.108 −0.063 0.951 -
ESG (Formative) 0.112 0.034 3.294 0.000*** 1.845
Total Assets 0.081 0.268 0.302 0.768 1.500
Firm Age 0.080 0.186 0.432 0.675 2.372
Leverage −0.134 0.156 −0.861 0.409 1.231
Lending −0.056 0.199 −0.279 0.786 1.409
Lag of Tobin’s Q 0.828 0.167 4.958 0.001** 1.241
***p < .01, **p < .05, *p < .1

These results support (Boakye et al., 2020; Shakil et al., 2019) which alludes that environmental
disclosures have a significant association with financial performance (Tobin’s Q), it also approves
H2a. Furthermore, the results from Table 7 show that reflective factor (S) social sustainability also
has a significant positive impact on financial performance of the banks for the pre-COVID-19 period.
These results are also in line with (Boakye et al., 2020; Ur Rehman et al., 2020; Shakil et al., 2019),
who argued that social sustainability positively affects financial performance. These results support
H2b. The results on the last reflective factor of (G) governance were found to be insignificant against
Tobin’s Q which suggest that the banks’ governance for the pre-COVID-19 period remained ineffec­
tive towards incorporating sustainable business practices, and, hence, it rejects H2c (Rehman et al.,
2020). Among the controlled variable, only size (total assets) showed a significant impact on
financial performance (see, Table 6). It alludes that the size does control the variation between
ESG disclosure and firm performance in the banking sector for the pr-COVID-19 period.

The regression analysis for the COVID-19 period explained in Table 8 and 9 explains for the ESG
practices and its dimensions. Results on the formative ESG factor show that ESG practices posi­
tively affected the financial performance of the banking industry for the COVID-19 period. These

Table 7. The nexus of ESG dimensions and firm performance for the (pre-COVID-19 Period)
Dependent
variable
Tobin’s Q
(Model
R2 = 0.531;
F = 3.957**) Coefficient Std. Error t-value p-value VIF
(Constant) 0.011 0.128 0.084 0.934 -
Environmental 0.544 0.207 2.623 0.014** 2.641
Social 0.549 0.249 2.206 0.036** 3.686
Governance −0.145 0.200 −0.728 0.473 1.544
Total Assets 0.440 0.237 1.857 0.074* 3.236
Firm Age 0.221 0.172 1.283 0.210 1.727
Leverage −0.200 0.163 −1.221 0.232 1.653
Lending −0.251 0.191 −1.313 0.200 1.904
Lag of Tobin’s Q 0.437 0.169 2.591 0.015** 1.548
***p < .01, **p < .05, *p < .1

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Table 8. The nexus of ESG disclosures and firm performance for the (COVID-19 Period)
Dependent
variable
Tobin’s Q
(Model
R2 = 0.889;
F = 16.035***) Coefficient Std. Error t-value p-value VIF
(Constant) −0.031 0.089 −0.063 0.951 -
ESG (Formative) 0.22 0.019 11.57 0.000*** 1.987
Total Assets 0.019 0.147 0.132 0.897 2.660
Firm Age 0.010 0.102 0.101 0.921 1.227
Leverage −0.144 0.134 −1.070 0.306 1.782
Lending −0.025 0.104 −0.240 0.814 1.444
Lag of Tobin’s Q 0.804 0.138 5.837 .000*** 2.364
***p < .01, **p < .05, *p < .1

results affirm that the importance of ESG practices has increased during the COVID-19 pandemic
for financial performance. Keeping in view Tobin’s Q results it is noted that the customers got
affected socially and environmentally due to the strict actions taken to contain the spread of the
virus. Hence, the stakeholders are now more interested in those banks which benefit them socially
and environmentally. The above results approve H3. The results align with previous studies that
found a positive impact of ESG on firm financial performance (Ur Rehman et al., 2020; Muhammad;
Zahid, Rahman et al., 2020).

Results in Table 9 show that the reflective factor of (E) environmental disclosures has a negative
and significant impact on financial performance (Tobin’s Q) during the COVID-19 period. The above
results reject H3a. Furthermore, these results show that the banks are not focusing more on safety
issues rather than green environmental practices. It is because the banks got financially affected
by the pandemic and due to that their prime focus shifted toward financial issues rather than the
green environment. And in the process, they have oversighted their focus on environmental
sustainability practices. The findings are in line with the previous authors who found the effect
in the same direction (Muhammad Zahid, Rahman et al., 2020). Results based on the reflective

Table 9. The nexus of ESG dimensions and firm performance for the (COVID-19 Period)
Dependent
variable
Tobin’s Q
(Model
R2 = 0.892;
F = 10.318**) Coefficient Std. Error t-value p-value VIF
(Constant) −0.007 0.108 −0.063 0.951 -
Environmental −0.125 0.024 −5.20 0.000*** 3.548
Social 0.139 0.032 4.242 0.000*** 3.037
Governance 0.276 0.103 2.679 0.001** 1.355
Total Assets 0.081 0.268 0.302 0.768 2.574
Firm Age 0.080 0.186 0.432 0.675 2.485
Leverage −0.134 0.156 0.861 0.409 2.049
Lending 0.051 0.199 0.256 0.783 2.520
Lag of Tobin’s Q 0.828 0.167 4.973 0.001 2.957
***p < .01, **p < .05, *p < .1

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factor (S) social disclosure show that it has a positive impact on the financial performance of the
bank in the COVID-19 period. It approves H3b of this study and indicates that the banks have
somehow addressed the social needs of their stakeholders during the COVID-19 pandemic. Results
are in line with the previous authors (Muhammad Zahid, Rahman et al., 2020).

Furthermore, the results of the final reflective factor (G) governance show that it has
a significant positive impact on the financial performance of banks for the COVID-19 period
which support H3c of the study. These results further show that the banking industry is now
more focused on its governance structure to improve sustainable business practices following the
COVID-19 pandemic. These results are in line with previous studies (Amina Buallay, Fadel, Al-Ajmi
et al., 2019) in that the governance disclosure has a significant association with Tobin’s Q. The (pre
and during) COVID-19 period comparison of the ESG practices provides important insights for
practitioners from the banking industry towards understanding the current demands of various
stakeholders and accordingly to strategies for it while attaining greater financial performance.
Better financial performance is vital to banks after COVID-19 because COVID-19 badly affected the
financial performance of banks.

5. Conclusion and way forward

This study first investigates the difference in the ESG practices of the banking sector for the (pre and
during) COVID-19 periods. Secondly, it also investigates the impact of the ESG disclosures on the
financial performance of the banking industry for the (pre and during) COVID-19 periods. The results
of the first objective indicate that there is a significant change in the ESG disclosures of the banking
industry of Pakistan for the (pre and during) COVID-19 period, i.e., from 2018 to 2020. The results are
in line with the first hypothesis of the study which suggests that there is a significant difference in
ESG practices of the banking industry for the (pre and during) COVID-19 periods as reflected by the
positive change in the mean values of the t-statistics. Therefore, it implies that the banking industry
is focusing more on ESG practices following the COVID-19 pandemic. It might be due to the fact that
the pandemic has changed the dynamic of every business sector including the banking industry.
Therefore, it seems that the banking industry has realized to get ready for any such circumstances in
future by mitigating its adverse effects through increasing compliance to good environmental, social,
and governance practices. The findings also explain that the formative factor of ESG remained
significant for both the (pre and during) COVID-19 periods. Interestingly, the formative factors vary
in their impact for the (pre and during) Covid-19 periods. For instance, during the (pre-COVID-19)
period, the reflective factors (environmental and social) had a significant while the governance
factor had an insignificant impact on the financial performance. However, the insignificant effect
of governance factor in pre-COVID-19 period became significant in COVID-19 period. Interestingly,
environmental sustainability was found to have a significant negative impact on the financial
performance of the banking industry for the COVID-19 period. It suggests that environmental
sustainability has not been seriously addressed by the banking industry during the COVID-19 period
that negatively affected their financial performance. Overall, the results provide important policy
recommendations for the government, regulatory bodies, and practitioners of the banking industry
to improve their financial performance and economic stability through prudent ESG practices.
Achieving better financial performance is vital to any financial institution after COVID-19. Because
COVID-19 has badly affected the financial performance of various industries in Pakistan including the
banking industry. The study update the banking industry on the importance of managing multiple
stakeholders in the pandemic and crisis situations. Besides, the study also contributes to the
literature on the nexus of ESG practices and financial performance in the banking industry of
a developing country like Pakistan, especially in pandemic situations.

Alongside implications, the study has some limitations which may be covered in future studies.
Firstly, this study is based on one-year data for each of the pre and COVID-19 periods. Hence, future
studies may increase the corresponding period. Secondly, future studies may consider the comparison
of conventional and Islamic banking industries. Thirdly, future studies may also consider the

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qualitative aspect of this inquiry. Last but not least, future researchers may also focus on other
industries as well. Besides, the model of the study may also be replicated in other developing
countries.

Funding Barnett, L. M., & Robert, M. S. (2012). Does it pay to be

The authors received no direct funding for this research. really good? Addressing the shape of the relationship
between social and financial performance. Strategic
Author details Management Journal, 33(11), 1304–1320. https://doi.
Muhammad Zahid1 org/10.1002/smj
E-mail: zahid@cusit.edu.pk Belkaoui, A., & Karpik, P. G. (1989). Determinants of the
ORCID ID: http://orcid.org/0000-0001-5790-7998 corporate decision to disclose social information.
Syeda Um-Ul-Baneen Naqvi1 Accounting, Auditing & Accountability Journal, 2(1),
Amin Jan2 36–51. https://doi.org/10.1108/09513578910132240
Haseeb Ur Rahman3, Bhagat, S., & Bolton, B. (2019). Corporate governance and
Said Wali4 firm performance: The sequel. Journal of Corporate
1
Management Sciences Department, City University of Finance, 58, 142–168. https://doi.org/10.1016/j.jcorp
Science and Information Technology, Peshawar, fin.2019.04.006
Pakistan. Boakye, D. J., Ahinful, G. S., & Nsor-Ambala, R. (2020).
2
Faculty of hospitality, Tourism and Wellness, Universiti Sustainable environmental practices and financial
Malaysia Kelantan, City Campus. performance relationships. Are they moderated by
3
Interdisciplinary Research Centre for Finance and Digital cash resources? Evidence from alternative invest­
Economy, King Fahd University of Petroleum and ment market in the UK. International Journal of
Minerals, Dhahran, Saudi Arabia. Technology and Management Research, 5(1), 14–29.
4
Department of Management Sciences, Government https://doi.org/10.47127/ijtmr.v5i1.80
College of Commerce Peshawar, Pakistan. Bogers, M., Chesbrough, H., & Strand, R. (2020).
Sustainable open innovation to address a grand
Disclosure statement challenge. British Food Journal, 122(5), 1505–1517.
No potential conflict of interest was reported by the author(s). https://doi.org/10.1108/BFJ-07-2019-0534
Buallay, A. (2019). Is sustainability reporting (ESG) asso­
Citation information ciated with performance? Evidence from the
Cite this article as: The nexus of environmental, social, and European banking sector. Management of
governance practices with the financial performance of Environmental Quality: An International Journal, 30
banks: A comparative analysis for the pre and COVID-19 (1), 98–115. https://doi.org/10.1108/MEQ-12-2017-
periods, Muhammad Zahid, Syeda Um-Ul-Baneen Naqvi, 0149
Amin Jan, Haseeb Ur Rahman & Said Wali, Cogent Buallay, A., Fadel, S. M., Alajmi, J., & Saudagaran, S.
Economics & Finance (2023), 11: 2183654. (2020). Sustainability reporting and bank perfor­
mance after financial crisis. Competitiveness Review:
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