The Status of Environmental, Social, and Governance Voluntary Disclosure in the GCC Banking Industry: Does It Pay to Be Socially Responsible?

Abstract

This research examines the bidirectional relationship between Environmental, Social and Governance (ESG) voluntary disclosure engagement and financial performance of a panel of banks extracted from the Gulf Cooperation Council (GCC) banking industry, covering a period of 11 years (2007–2017). We find that GCC banks, and in particular Islamic banks, voluntarily disclose low level of information related to ESG activities. Using system GMM methodology, we provide evidence that ESG disclosure adversely affects bank performance, regardless of the bank performance measure used. Thus spending on ESG turns out to be costly for GCC banks, a result that is consistent with the agency problem, where managers are likely to reduce long-term expenditures related to ESG actions in order to boost short-term profits. As managers' compensations often relate to short-term financial performance, managers tend to reduce their spending on ESG activities. Furthermore, contrary to previous research, our results indicate that the relationship between ESG and financial performance is bidirectional and dynamic. We also find evidence that ESG disclosure positively affects performance only for well-diversified banks. Finally, although conventional banks disclose significantly more information related to ESG activities, we do not find any significant differences between the two types of banks in the relationship between ESG disclosure and performance. Our suggestion is that these results are consistent with what we call “clientele” and “gravitation” effects, where a customer tends to choose to deal with the bank that reflects his religious beliefs (gravitation effect) and with the bank that provides him with the best services (clientele effect) regardless of its ESG disclosure.

Citation

Al-Khouri, R. and Abdul Basith, A.A. (2022), "The Status of Environmental, Social, and Governance Voluntary Disclosure in the GCC Banking Industry: Does It Pay to Be Socially Responsible?", Ferris, S.P., John, K. and Makhija, A.K. (Ed.) Empirical Research in Banking and Corporate Finance (Advances in Financial Economics, Vol. 21), Emerald Publishing Limited, Leeds, pp. 155-189. https://doi.org/10.1108/S1569-373220220000021006