The impact of ESG on the bank valuation: evidence of moderation by ICT

Abstract

Purpose The banking sector is undergoing a phase of transition worldwide. The degrees of flux may vary from country to country. Metamorphosis causes include financial distress, corporate governance issues, environmental and social issues and an avalanche of technological advancements. This study aims to explore how environmental, social and governance (ESG), one of the essential and contemporary change agents across the sectors, including in the banks, impacts the valuation of the banking sector. In addition, this study also aims at how another vital and inevitable change agent, information and communications technology (ICT) expenses, influence the ESG’s impact on bank valuation. Design/methodology/approach Panel data regression is conducted using valuation (Tobin’s Q and market capitalization) as endogenous variables, and ESG and expenditure on ICT are used as the main exogenous variables. The interaction term of ESG and ICT is also used as an exogenous variable. Findings Surprisingly, the authors find unequivocal evidence of the positive influence of ESG and ICT on bank valuation without consideration of ICT. In addition, ICT is also found to moderate the ESG’s influence on bank valuation positively. In particular, when ICT is low, an increase in ESG impacts the valuation negatively. However, high values of ICT cause ESG to impact the valuation positively. Research limitations/implications Without consideration of ICT, ESG investments coincide with the value-creating hypothesis. However, modern world firms do not have a choice of ignoring ICT, which is essential to sustain. Adequate investments in ICT shift the value-eroding ESG effects (at low ICT) toward a value-creating hypothesis (at high ICT) when ESG investments start to impact the value positively. Practical implications In practice, modern-day firms have no choice but to align with ESG investments. In cases where ESG tends to erode value (at low ICT), the firms should, in parallel, choose to make some ICT investments. Such combined and balanced attention to ICT, along with ESG, will undoubtedly benefit the firms financially. Originality/value The study’s significant implications are on the stakeholders’ mindsets, who may not have clarity on the role of ESG and ICT in the bank’s performance and subsequent valuation. The policymakers may also restructure their long-term policy on ESG in the banking sector using the current study’s findings.