Influence of key ESG factors on Islamic banks’ financial performance: Evidence from GCC countries

With the global emphasis on sustainability, this research highlights the crucial role Islamic banks can play in sustainable development. The study evaluates how Environmental, Social, and Governance (ESG) practices impact the performance of Islamic banks in GCC countries from 2010 to 2021 using the generalized method of moments (GMM) approach to address potential endogeneity in panel data. Our findings show that while the overall ESG score does not significantly impact bank performance, individual ESG components do. The social component positively affects several performance indicators, governance impacts Return on Equity (ROE), and the environmental factor correlates positively with Tobin's Q. Despite the growing focus on ESG principles, their integration in Islamic banking is limited. By improving ESG performance and offering niche market services, Islamic banks can significantly contribute to sustainability. The study advises bank executives, investors, and policymakers to integrate ESG considerations into business and regulatory strategies to enhance the sector's role in achieving sustainability goals.