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Finance, Accounting and Business Analysis 
Volume 7 Issue 2, 2025 

http://faba.bg/       
ISSN  2603-5324 

DOI: https://doi.org/10.37075/FABA.2025.2.06 

 

Does ESG Compliance Drive Commercial Banks Stock Returns? 

Evidence from the South African Market 

Babatunde Lawrence1 , Fabian Moodley2*  

  
North-West University, Vanderbijlpark, South Africa1 

North-West University, Vanderbijlpark, South Africa2 

* Corresponding author 

 

Info Articles   Abstract 
 

History Article: 

Submitted 28 March 2025 

Revised 22 June 2025 

Accepted 6 August 2025 

 Purpose: The study examined the effect of environmental, social and 

governance (ESG) on the commercial bank returns in South Africa. 

Design/Methodology/Approach: The study made use of a cross 

sectional panel model for the sample period 2015-2024. The dependent 

variable included five South African commercial banks (ABSA, 

Standard bank, Nedbank, Capitec Bank and Investec Bank) and the 

independent variable comprised of ESG ratings for each bank. The 

study also introduced control variables in the form of macroeconomic 

variables, namely, inflation, money supply, short-term interest rate, 

long-term interest rate, gross domestic product and real effective 

exchange rate. 

Findings: The findings demonstrate that commercial bank returns in 

South African is negatively affected by ESG compliance. Moreover, 

gross domestic product, short-term interest rate, long-term interest rate 

and real effective exchange rate has a positive effect on commercial 

bank returns. 

Practical Implications: Firstly, the prudent authority which governs 

the financial market must re-examine policies requiring South African 

commercial banks to be ESG compliant as it reduces the return 

perspective of each bank. Secondly, the Asset-Liability Committees 

(ALCO) of commercial banks should develop strategies that alters the 

mix of assets and liabilities to better manage the costs associated with 

ESG compliance. This way they can better manage the negative effect 

of ESG compliance on banks returns. 

Originality/Value: This study is the first to consider ESG compliance 

as a determinant of commercial bank returns in South Africa. Hence, 

the study provides insight into the effect between ESG compliance and 

commercial bank returns. It, therefore, contributes to emerging market 

literature which is centred on bank performance as appose to bank 

returns. 

Paper Type:  Research Paper  

 

Keywords:  

ESG, Bank returns, South 

Africa, Panel model, 

Macroeconomic variables. 
 

 

JEL: G01, G10, G11.  

* Address Correspondence:   

E-mail: 217081567@nwu.ac.za1   

  Fabian.Moodley@nwu.ac.za2 

 

 

 

  

http://faba.bg/
https://doi.org/10.37075/FABA.2025.2.06
mailto:Fabian.moodley@nwu.ac.za1
mailto:Fabian.Moodley@nwu.ac.za
https://orcid.org/0000-0001-5385-6812
https://orcid.org/0000-0001-8954-4933


Babatunde Lawrence, Fabian Moodley/ Finance, Accounting and Business Analysis, Volume 7, Issue 2, 2025 

199 

 

INTRODUCTION 
 

The banking sector of  South Africa comprises of  a central bank known as the South African Reserve 

Bank (SARB) which oversee the operations of  commercial banks within the borders of  South Africa (Xulu 

2022). The SARB is considered a systemically important bank as the failure or insolvency will lead to 

termination in operations of  commercial banks. In South African there exist various commercial banks that 

participate in the banking sector, however, the five important commercial banks that accounts for more than 

80 percent of  banking assets in South Africa is Standard Bank, ABSA bank, Capitec Bank, Nedbank and 

Investec Bank (Ngwenya 2022). The duties of  these commercial banks are to accept money in the form of  

deposits and then use these deposits to generate loans for individuals, businesses and governments 

(Mofokeng and Moodley 2025). The profitability of  commercial banks is largely dependent on the exposure 

to credit risk, operational risk and market risk, where such exposure if  not correctly identified and mitigated, 

will consume the capital base of  banks and lead to a decrease in retained earnings, effecting share prices and 

shareholder returns (Lawrence and Doorasamy 2021). This was clearly evident during the 2007/2008 Global 

Financial Crises (GFC) as there was excess on and off the balance sheet leverage of banks caused by excess 

lending coupled with enhanced client default (Acharya and Richardson 2009). The limited capital regulation 

of banks reduced the commercial banks' ability to cope with the enhanced client defaults. This caused the 

South African banking sector to become highly volatile, such that banking returns fell in value, and the 

bearish market condition prevailed (Luchtenberg and Vu 2015).  
The inability of  commercial banks to mitigate the GFC resulted in the Basel Committee on Banking 

Supervision (BCBS) developing the Basel III accord to strengthen commercial banks resilience to financial 

market uncertainty (Fratianni and Pattison 2015). Until recently, investors are no longer looking at 

commercial banks’ ability to mitigate financial market uncertainty, rather, they are now interested in the 

environmental, social and governance (ESG) compliance of commercial banks. The environmental pillar 

focuses on the commercial banks impact on the natural world, such as climate change, pollution, resource 

management and waste reduction (Clément et al. 2025). The social factor highlights the relationship the 

commercial banks have with its employees, customers, communities and other stakeholders (Martiny et al. 

2024). The primary focus is considering factors like labor practices, diversity and inclusion, human rights, 

and community engagement (Chopra et al. 2024). The last factor, governance, focuses on the systems and 

structures that guide a company's operations and decision-making, including board composition, 

executive compensation, shareholder rights, transparency, and ethical business practices (He et al. 2024) . 

For instance, Moodley et al. (2024) found that investors in South Africa have become more conscious to 

sustainable finance, whereby they are looking for banks that are ESG compliant. This implies that investors 

are reluctant to hold deposits with non-compliant commercial banks, which effects banks operations and 

ultimately commercial bank returns (Moodley et al. 2024). Consequently, the responsible investor behavior 

has over the years forced commercial banks to foster in ESG principles in the daily operations to ensure they 

maintain their investor base and share price stability (Folqué et al. 2021). This requires commercial banks to 

comply with all government regulations pertaining to each pillar of the ESG framework, failure to do so will 

result in the commercial bank being non-compliant (Minkkinen et al. 2024). 

In attempt to understand this phenomenon of  ESG compliance, many academics attempt to examine 

the relationship between ESG and commercial banks returns. However, majority of  literature is centred 

around international commercial banks, with no study considering South African commercial banks, despite 
the importance of  sustainable investing (Carnevale and Mazzuca 2014; Miralles-Quirós, Miralles-Quirós 

and Redondo‐Hernández 2019; Ersoy et al. 2022). Moreover, literature demonstrates conflicting findings, 

such that certain academics find that ESG compliance enhance banks returns whereas other academics 

demonstrate that ESG compliance negatively effects commercial bank returns. Consequently, there is no 

consensus on whether ESG compliance influences commercial bank returns and if  such compliance drives 

commercial bank returns. Accordingly, to contribute to the debate and rectify the inconclusive findings, this 

study examines the effect of  ESG on South African commercial bank returns. The achievement of  the 

research objective contributes to literature in various ways. Firstly, this study introduces a new concept to 

the South African banking sector returns, known as ESG, which is yet to be done, therefore broadening the 

empirical base given the evolution to stainable investing. Secondly, this study provides evidence of  the 

relationship between ESG compliance and commercial bank returns, therefore, the banking supervisory 

department can use the findings to make more informed decisions on ESG initiatives. Thirdly, the findings 

may assist investors, if  it is found that ESG drives commercial bank returns, then investors need to consider 

ESG principles in their investment strategies as it will result in enhanced returns, the opposite holds true as 

well. Lastly, the findings will assist policy makers in making more informed decisions on policies governing 

ESG compliance of  commercial banks, such that policies should be either relaxed or enhanced to ensure 

financial stability of  banks.  



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The remaining paper is outlined as follows: section 2 presents the literature review, which is segregated 

according to the theoretical propositions and empirical review. Section 3 presents the methodology, which 

comprises of  the data and empirical model used in the study. Section 4 provides the results as generated from 

the empirical model, whereas Section 5 discusses the results in relation to past literature, highlighting the 

practical and economic implications. Section 6 then concludes the research paper, by providing a synthesis 

of  the findings and future scope for similar studies.  

 

LITERATURE REVIEW 

 
The concept of  ESG compliance is imbedded in the “doing good while doing well” theory which 

postulates that investors can attain success while simultaneously having a positive social impact by including 

ethical and social responsive initiatives into their investment strategies (Statman and Glushkov 2009). 

Coherent with this theory, academics have examined the influence of  responsible investing like ESG on 

commercial banks. However, majority of  literature is centred around bank performance. For instance, El 

Khoury (2021) examined the effect of  ESG on bank performance and return in the Middle East, North 

Africa and Turkey. The study incorporated monthly data for the period 2007-2019, which was used in a 

panel regression analysis. The authors controlled for macroeconomic factors such as gross domestic product 

(GDP) and inflation to isolate the effects of  ESG. The findings demonstrated that ESG has a nonlinear 

relationship with return on assets (ROA) and return on equity (ROE) (proxy for bank performance) and bank 

returns where the effect is dependent on the level of  ESG compliance and variables used to measure bank 

performance.   
Yuen et al (2022) examined the effect of  ESG on banking sector performance and profitability of  51 

countries. Using monthly data for the period 2006 to 2021, the generalized method of  moments 

(GMM) model demonstrated that ESG has a negative effect on commercial bank performance, such that it 

increases operating costs for banks. Moreover, in the long-run ESG increases bank profitability. Similarly, 

Menicucci and Paolucci (2023) also examined the effect of  ESG on bank performance. However, they used 

an Ordinary Least Squared (OLS) regression analysis. The findings of  the OLS model demonstrated that 

bank performance is negatively impacted by ESG compliance. Thus, Italian banks have not embraced strong 

sustainability procedures. In line with this, Indrasuci and Rokhim (2023) used a panel regression model to 

examine the determinants of  bank performance in East Asia countries for the period 2017-2021. The authors 

employed ROA and ROE as a proxy for bank performance whereas ESG was considered as a determinant. 

The findings relevaled that ESG has a negative impact on bank performance and return, such that banks 

who are more compliant are more adversely affected. 
Contrary to the above findings, Lamanda and Tamásné Vő neki (2024) examined the effect of  ESG 

compliance on bank performance in Central European countries for the period 2017-2021. The authors used 

monthly data from banks financial reports to gather ESG score whereas bank performance was measure by 

ROA and ROE. The panel regression model demonstrated that ESG has no significant effect on bank 

performance, suggesting that bank performance is independent to ESG compliance. Moreover, the findings 

suggest that there is adequate cost saving strategies in place for Central European banks to mitigate expenses 

from rising ESG compliance. Jaiwani and Gopalkrishnan (2025) also examined the effect of  ESG 

compliance on bank performance, but they focused on Indian commercial banks. The findings of  the panel 

regression model demonstrated that ESG compliance has a negative effect on ROA and ROE. This suggests 

that India’s commercial banks performance is not resilient to ESG enhancements by the Indian governments.  
In the South African context there exists two studies that have considered ESG compliance in the 

banking sector. Xulu (2022) conducted a systematic review of  literature (SRL) to determine if  South African 

commercial banks are incorporating ESG principles. The findings reveal that there are no mandatory 

requirements for commercial banks in South Africa to implement ESG in their daily operations and as such 

commercial banks do so on a voluntary basis. Moreover, Nedbank is found to be the most compliant followed 

by Investec bank, Standard Bank, ABSA bank and Capitec bank. In line with these findings Ngwenya (2022) 

investigated the effect of  ESG compliance on six commercial banks. The study made use of  monthly data 

for the period 2017-2021 and used a panel regression model. The findings revealed that ESG compliance has 

a positive effect on Standard Bank, Capitec bank, Nedbank, Investec bank, First National Bank and ABSA 

bank performance. That being enhance ESG compliance increases the operating efficiency of  banks.  
While majority of  literature is centred on ESG compliance and bank performance, some academics 

have embraced the notion that bank returns is directly influenced by ESG compliance. However, such studies 

are very limited internationally with no study evident in South Africa. For instance, Carnevale and Mazzuca 

(2014) used a panel regression model to examine the effect of  ESG compliance on European commercial 

bank returns. The authors implemented a sample period comprising of  quarterly data for the period 2011 to 

2002. The findings revealed that ESG compliance has a negative effect on commercial bank returns. The 

authors attribute these findings to the increase costs associated with meeting the initiatives of  sustainable 



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banking practices. Miralles-Quirós, Miralles-Quirós and Redondo‐Hernández (2019) also used a panel 

model to examine the effect of  ESG compliance on commercial bank returns, but the authors conducted a 

comparative analysis between developed and developing countries. The findings revealed that commercial 

bank returns in developed countries are positively influenced by ESG compliance whereas developing 

countries commercial bank returns is negatively affected by ESG compliance. That authors suggest that 

developed nations have created policies that makes commercial banks more resilient to ESG compliance 

whereas developing countries are yet to develop such policies.  
In a more recent study, Ersoy et al. (2022) examined the effect of  ESG compliance on the market 

value of  commercial banks in the United States (US) banking sector. The authors consider the returns of  

commercial banks as a proxy for market value whereas ESG compliance was attained from the financial 

statements of  commercial banks. The unbalance nonlinear panel model demonstrates that there is a time-

varying effect between ESG compliance and commercial bank returns. That being, the state of  the bank 

sector dictates the effect, where ESG compliance has a negative effect on commercial bank returns during 

COVID-19 but pre-COVID-19, bank returns was positively influenced by ESG compliance.  

The review of  empirical literature reveals that ESG compliance and the banking sector is dominated 

in the international setting with little to no emphasis placed on South African commercial banks. Moreover, 

where studies have considered ESG compliance in the banking sector, literature is centred on the effect of  

ESG on banking performance as appose to banking return. Furthermore, there is mixed findings on the 

influence of  ESG on commercial bank performance as some academics find a positive effect whereas other 

authors find a negative effect and some finding no effect. On this basis the study examines the effect of  ESG 

on commercial bank returns in South Africa. The study is important as it contributes to solidifying the mixed 

findings and introducing the concept within the South African banking sector which is non-existent. 

Therefore, the findings of  the study will have important implications for investors, fund managers and policy 

makers which will better assist these individuals with carrying out their duties.  

 

METHODS 

 

The study employs a panel data regression analysis which entails the use of  the random model (RM) 

and the fixed effects (FE) as an empirical model to analyse the relationship between the South African bank 

returns and the ESG compliance of  the same banking sector in South Africa. As used by Lawrence, 

Doorasamy and Sarpong (2020), Anande-Kur et al (2020) and Al-Homaidi et al (2018), the study uses the 

panel model as expressed in the model specification. 

 

Data source 
The authors constructed a cross-sectional dataset from the annual balance sheet of  sampled banks for 

the estimation of  the returns. The quarterly returns of  the banks are estimated from equation 1, from their 

price values which are extracted from McGregor data base, alongside the macroeconomic related variables 

and the ESG values. The top 5 banks (ABSA, Standard bank, Nedbank, Capitec Bank and Investec Bank) 

from the South African banking system were selected for this study based on the percentage contribution of  

their collective assets to the South African banking sector. Hence the sample size for these 5 banks was 

arrived based on availability of  data and set criteria covering the period 2015 to 2024.  

𝑃𝑅𝑖𝑡 =
𝑝𝑡𝑖 − 𝑝𝑡𝑜

𝑃𝑡𝑜
 (1) 

where: 𝑝𝑡𝑖, 𝑝𝑡𝑜 and 𝑃𝑅𝑖𝑡 represent the price at the current time, price at the initial time, and price 

return respectively. 

 

Model specification 

𝐵𝑎𝑛𝑘 − 𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑖𝑡 = 𝑎0 + 𝜆1𝐸𝑆𝐺𝑖𝑡 + 𝜆2 𝐶𝑃𝐼𝑖𝑡 +  𝜆3𝑀2𝑖𝑡 +  𝜆4𝑆𝑇 − 𝐼𝑁𝑇𝑖𝑡 +
              𝜆5𝐿𝑇 − 𝐼𝑁𝑇𝑖𝑡 +  𝜆6𝐺𝐷𝑃𝑖𝑡 + 𝜆7𝑅𝐸𝐸𝑅𝑖𝑡 + 𝑒𝑡𝑖𝑡   

(2) 

 

where: 𝐵𝑎𝑛𝑘 − 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 is the returns on bank i for the year t, 𝝀1, is a constant term,  𝝀2 to, 𝝀7 are 

the coefficients of  the independent variables. ESG is the environmental, social and governance (ESG) 

compliance of  commercial banks. CPI represents the consumer price index, which is the proxy for inflation, 

M2 represents the money supply of  the country, ST-INT and LT-INT represent the short- and long-term 

interest rate, as GDP and REER represent the gross domestic product and the real exchange rate of  the SA 

economy under the observed period. 



Babatunde Lawrence, Fabian Moodley/ Finance, Accounting and Business Analysis, Volume 7, Issue 2, 2025 

202 

 

Variable used in the analysis 
ESG Compliance Score: Environmental, social, and governance (ESG) is another name for 

an investing principle that prioritizes environmental issues, social issues, and corporate 

governance. Investing with ESG considerations is sometimes referred to as responsible investing or, in more 

proactive cases, impact investing (Gelle 2023).  

Bank Returns: Like those of any company, are the profit or loss an investor makes on their investment, 

calculated as the percentage change in price over a period, and can be influenced by various factors like 

company performance and broader market conditions.  

Gross Domestic Product: GDP is a macroeconomic indicator that indicates the value of economic 

output of a country adjusted for price fluctuations (i.e., inflation or deflation). With this modification, 

nominal GDP – a money-value metric—becomes an indicator of the amount of overall output (Barasa 2014). 

Money supply (M2): In macroeconomics, money supply (or money stock) refers to the total volume 

of money held by the public at a particular point in time. There are several ways to define "money", but 

standard measures usually include currency in circulation (i.e. physical cash) and demand 

deposits (depositors' easily accessed assets on the books of financial institutions) (Brunner 2018).  

Real Exchange Rate: The currency volatility has effects on the stock returns. When currency 

appreciates, in a situation where the country is export-oriented, it is expected that there will be a reduction 

in the competitiveness of exports and would therefore have a negative impact on the domestic stock market. 

This is because the export-oriented companies quoted on the stock exchange market would be less profitable 

and this may in turn become less attractive to investors (Muthike and Sakwa 2012). 

Inflation (CPI): Inflation as measured by consumer price index is a macroeconomic index that 

measures the rate of raise in the cost of living and results in a shift of resources from investments to 

consumption. The demand for market instruments falls leading to reduction in the volume of stock traded. 

This will force the monetary policy authorities to respond to the increased rate of inflation with economic 

tightening policies, which in turn increases the nominal risk-free rate, which raises the discount rate in the 

valuation model (Adam and Twenoboa 2008). 

 

RESULTS AND DISCUSSION  

 

Table. 1 Descriptive statistic 

 
Bank 

returns 
ESG CPI M2 ST INT LT INT GDP REER 

Mean 46993.00 2.9366 4.2698 7.1763 6.4625 3.4867 -1.3744 0.3809 

Median 18915.50 2.8300 4.4000 6.6000 7.0700 3.8100 -0.95 0.4654 

Maximum 313434.0 4.7700 6.9000 15.7100 8.6300 5.0300 5.5000 10.7357 

Minimum 7500.000 2.0000 1.3000 2.3700 3.4700 1.5800 -10.9 -11.5234 

Std. Dev. 62425.77 0.7271 1.2676 2.8826 1.5370 1.1322 2.9851 4.2478 

Skewness 2.2288 0.6980 -0.2363 1.2144 -0.6622 -0.2189 -0.6924 -0.1689 

Kurtosis 7.4806 3.0639 2.9847 4.5186 2.2555 1.6300 4.5535 3.6510 

         

Jarque-Bera 259.6477 12.6939 1.4529 53.3328 15.0034 13.4451 28.1495 3.4977 

Probability 0.0000 0.0018 0.4836 0.0000 0.0006 0.0012 0.0001 0.1739 

         

Sum 7330908. 458.1100 666.1000 1119.500 1008.150 543.7800 -214.4 59.4216 

Sum Sq. 

Dev. 

 

6.04E+11 

 

81.95350 

 

249.0684 

 

1287.949 

 

366.1729 

 

198.6990 

 

1381.19 

 

2796.887 

Observations 156 156 156 156 156 156 156 156 

Levin, Lin & 

Chu t* 

(Level) 

0.9195 0.5535 0.0000 0.2508 0.5115 0.065 0.0000 0.0000 

First 

difference 
0.0000 0.0000 0.0000 0.0000 0.0039 0.0650 0.0000 0.0000 

Source: Authors’ own estimation (2024). 

 

Table 1 reveals the descriptive statistics of all the variables used in this study. Bank return has the 

https://en.wikipedia.org/wiki/Investment
https://en.wikipedia.org/wiki/Environmental_issues
https://en.wikipedia.org/wiki/Social_issues
https://en.wikipedia.org/wiki/Corporate_governance
https://en.wikipedia.org/wiki/Corporate_governance
https://en.wikipedia.org/wiki/Socially_responsible_investing
https://en.wikipedia.org/wiki/Impact_investing
https://en.wikipedia.org/wiki/Macroeconomics
https://en.wikipedia.org/wiki/Money
https://en.wikipedia.org/wiki/Circulation_(currency)
https://en.wikipedia.org/wiki/Cash
https://en.wikipedia.org/wiki/Demand_deposits
https://en.wikipedia.org/wiki/Demand_deposits
https://en.wikipedia.org/wiki/Asset
https://en.wikipedia.org/wiki/Financial_institution


Babatunde Lawrence, Fabian Moodley/ Finance, Accounting and Business Analysis, Volume 7, Issue 2, 2025 

203 

 

highest mean with 46993, while GDP has the lowest value of -1.3744. It is important to note that bank 

returns also has the highest standard deviation with ESG having the least standard deviation. The result also 

reveals that bank returns and real exchange rate has the maximum and minimum values with 313434 and 

7500 respectively. It is interesting that ESG score has a mean of 2.9366 and a standard deviation of 0.727. 

This illustrates that the volatility of the sector is not clustered around its mean. More so, the skewness of 

bank returns, ESG, CPI and M2 values are positive, illustrating that the headline returns are skewed to the 

right with a long tail. However, the rest of the macroeconomic variables are positioned on the left. The 

Jarque-Bera test with the exception of CPI, and REER, the rest of the variables are at 1 percent significance. 

This demonstrates that the variables are not normally distributed. It is important to note that the Levin, Lin 

and Chu stationarity tests for all variables are significant at the 1 percent level in first difference. This suggests 

that the null hypothesis of all variables having a unit root is rejected in favour of the alternative hypothesis, 

this implies that only CPI, GDP and REER are stationary at level. 

 
Table 2. Correlation Matrix 

Probability Bank returns ESG CPI M2 ST INT LT INT GDP REER 

Bank returns 1        

 -----        

ESG -0.4968 1       

 0 -----       

CPI -0.0942 -0.1417 1      

 0.2418 0.0777 -----      

M2 -0.0896 -0.0117 
-

0.1571 
1     

 0.2657 0.8848 0.0502 -----     

ST INT 0.0319 -0.0291 0.1268 
-

0.3033 
1    

 0.6926 0.7185 0.1146 0.0001 -----    

LT INT 0.2307 0.5152 
-

0.3674 
0.1816 -0.1060 1   

 0.0038 0 0 0.0232 0.1877 -----   

GDP 0.0392 0.0582 0.2525 
-

0.3423 
0.2033 -0.1737 1  

 0.6272 0.4707 0.0015 0 0.0109 0.0301 -----  

REER 0.0454 0.0207 
-

0.0425 

-

0.1112 
0.0263 -0.0195 0.1807 1 

 0.5739 0.7973 0.598 0.1669 0.7447 0.8091 0.024 ----- 

Source: Authors’ own estimation (2024). 

Table 2 shows the correlation matrix of all variables. It is interesting to note that except for long-term 

interest rate, all macroeconomic variables are not significantly correlated to the ESG compliance score. 

Hence no evidence of multicollinearity. Also, it reveals that there is a negative correlation between bank 

returns and ESG score. 

 
  



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Table 3. Regression Analysis 

Variables Random result with returns 
Fixed effect result with 

returns 
Pool result with returns 

C 
164644.8*** 

(5.961855) 

103937.5*** 

(4.773245) 

164644.8*** 

(6.174718) 

ESG 
-76994.04*** 

(-14.81685) 

-42024.74*** 

(-5.919463) 

-76944.04*** 

(-15.3459) 

Control variable result 

CPI 
-646.1636 

(-0.233139) 

-810.5547 

(-0.429011) 

-646.1636 

(-0.241463) 

M2 
-3925.263*** 

(-3.198924) 

-2813.372*** 

(-3.296331) 

-3925.26*** 

(-3.313139) 

ST-INT 
-37.51087 

(-0.017146) 

36.592447 

(0.024538) 

-37.51087 

(-0.017758) 

LT-INT 
41263.00*** 

(11.56118) 

26659.48*** 

(7.704538) 

41263.00*** 

(11.9739) 

GDP 
3292.698*** 

(2.756874) 

2297.139*** 

(2.755018) 

3292.698*** 

(2.8553) 

REER 
431.9307 

(0.564540) 

283.0228 

(0.542422) 

431.9307 

(0.58469) 

 R-squared= 0.6429 R-squared=0.8257 R-squared=0.6429 

 
Adjusted R-

squared=0.625997 

Adjusted R-

squared=0.81367 

Adjusted R-

squared=0.6259 

Husman 

test 

Chi-Sq. statistic = 17.7368 

Probability= 0.0000 

Source: Authors’ own estimation (2024). 

Table 3 presents the results of the pool, random and fixed effects of the regression between bank 

returns, ESG compliance and the control variables. It is crucial to first note that the probability value of the 

F-statistic of all regressions is significant at a 1% level. However, the fixed effect model shows the highest R 

(82.57) and R squared value (81.36%) respectively compared to the random and the pooled regressions. 

Evaluating the results of both the fixed and random effect, one could see that there are considerable 

interesting outcomes. However, panel results are justified through the choice of weather the fixed or random 

effect is most appropriate in modelling the desired objective. Hence, the Hausman test aids in determining 

the best fit model between fixed effect and the random effects within a panel data model (Amin et al. 2012). 

Therefore, the Hausman test result shows a Chi-sq, p value of 0.0000, suggesting the fixed effect model is 

the best fitted model for this study. 

 

Discussion 

The ESG compliance score is estimated to have a negative statistically significant relationship with 

bank returns at a 1% level. This is suggestive of the fact that South African banks returns have a negative 

relationship with ESG compliance. It further connotes that ESG score of South African banks do not have 

a positive impact on their returns. This result is unique but similar to Yuen et al (2022), Menicucci and 

Paolucci (2023), and Indrasuci and Rokhim (2023) which showed that ESG has a negative effect on 

commercial bank performance. Empirical evidence outside South Africa such as Carnevale and Mazzuca 

(2014) suggests similar negative association between ESG compliance and bank returns. The authors 

emphasized increase in cost associated with meeting the initiatives of sustainable banking practise as reasons 

for the inverse relations. This reason could also be related to the findings of ESG having a negative impact 

on South African bank returns. Zulu (2022) further posit in its systematic review of literature that there are 

no mandatory requirements for commercial banks strict compliance to ESG principles in their daily banking 

operations. Hence, this could be a deliberate attempt by South African banks to avoid the cost associated 

with compliance with the operations of ESG. 

Furthermore, the control variables relationships show some interesting outcome with bank returns. 

While CPI, and REER show no statistically significant relationship with South African bank returns, M2, 



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205 

 

long-term interest rate and GDP show a statistically significant relationship at a 1% level. For M2, there 

exist a significant negative relationship with South African bank returns. This implies that the increase in 

M2 does have a negative impact on bank returns. GDP has a positive significant relationship with South 

African bank returns at 1% level. This result is contrary to Okech and Mugambi (2016) who reveals a 

negative and insignificant relationship between bank stock returns and GDP. However, consistent with 

Laichena and Obwogi (2015) who found a positive relationship between banks stock returns of three East 

African economies. The result suggests that economic growth plays a vital role in determining the returns of 

South African banks. Further suggestive that a buoyant economy strengthens banks return per unit of 

investment into business in the economy. Furthermore, the result shows that both short term and long-term 

interest rates has a positive significant relationship with South African bank return. The result is contrary to 

Nurazi and Usman (2016) who found a negative effect of interest rate on bank returns in Kenya. The positive 

significant outcome between long-term interest rate and South African bank return suggests that most South 

African banks widen the spread between the interest earned on loans and the interest paid on deposits hence 

boosting their net income and potentially attracting more deposit. REER shows a positive significant 

relationship with bank returns. This result is contrary to Nurazi and Usman (2016) who found a negative 

significant relationship between exchange rate and bank returns. 

 

CONCLUSION  

 
This study seeks to establish if ESG compliance of banks could drive their stock return in South 

Africa. Hence, using the panel data, fixed effect model, the study regressed bank returns (response variable) 

against ESG bank compliance (explanatory variable) alongside CPI, GDP, REER, M2 and short- and long-

term interest rate as control variables. The study finds that ESG compliance do not positively affect bank 

returns, but rather negatively affect bank returns in South Africa. Interestingly certain macroeconomic 

variables such as GDP, both short and long-term interest rate, and REER all impact bank returns positively. 

As an emerging market economy, with a banking industry that is striving and excelling as one of the strongest 

and most stabilized banking industry within the emerging market economy and even in Africa. The 

compliance of its banking sector to the ESG requirements in operating its businesses is very crucial, because 

investors in the country are becoming more conscious to sustainable finance. Hence, investors are likely to 

pull away their funds and investments from commercial banks that are not ESG compliant in the country. 

Even though ESG compliance may come at an initial cost but assures benefits and huge returns at the end. 

This initial cost could be a huge hinderance to positive returns for these banks, however consistency in 

observing it would attract better and huge investments from within and outside the country in the long run.  

The study therefore recommends that policymakers in the banking sector and the regulators (eg the 

SARB) should ensure strict compliance with ESG standards for all banks with the view of sustaining it in 

the long term. This could be possible by closely monitoring disclosures of ESG frameworks in their 

governance structure, risk management and business processes before implementation. 

 

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