Banks' environmental policy and business outcomes: The role of competition

Abstract

By integrating the two areas of competition–performance and environment–performance, this research explores if competition matters in the relationship between environmental practices and interest margins in the market. A panel of 458 banks from 74 countries for the period of 2006–2016 is used, and the sample is further divided into developed and developing countries. This paper uses the system Generalized Method of Moments estimator to tackle potential omitted variable bias, endogeneity, and simultaneity issues. Without competition, environmental practices only affect banks in developing countries; however, the results show a significant impact for the full sample, including developed countries, when the competition is taken into consideration, suggesting that competition might play a role in the relationship of environmental practices and interest margins. In the full sample, competition impacts the relationship negatively after a moderate level of competition is reached in the market. The environmental practices in developing countries are prone to competition in the market. In developed countries, the competition is found to be lightly positively moderating the impact of environmental practices on interest margins. Based on these findings, it is recommended that developing countries should have a low or moderate level of competition to encourage environmental practices. For developed countries, however, high competition should be preferred to encourage banks to consider environmental practices as one of their core business strategies. These findings are found robust to different statistical estimators.

Banks' business strategy and environmental effectiveness: The monitoring role of the board of directors and the managerial incentives

“…Consistent with earlier research calls (Di Tommaso & Thornton, 2020;Gallego-Alvarez & Pucheta-Martínez, 2020;Khattak & Saiti, 2021), there is a need for a deeper investigation into the effects of banks' governance strategy on climate change with regard to the actual environmental impact. Previous studies have found that corporate governance mechanisms are related to better performance or corporate social responsibility (CSR) for the banking industry, especially when the functions are reported directly to the board of directors (BoDs) (Aebi et al, 2012;Basel Committee on Banking Supervision, 2015;De Andrés & Vallelado, 2008;Orazalin, 2019).…”

“…In this context, the financial sector can play an important role in achieving carbon neutrality by contributing to an increase in the level of climate change monitoring at the global level. Financial institutions are responding to the problem of climate change in several ways: carbon emission reduction and energy efficiency improvement, transparency regarding their climate change risk/performance, investing in renewable projects and the inclusion of the finance industry in the sustainable agenda goals (Gallego‐Álvarez & Pucheta‐Martínez, 2020; Galletta et al, 2021; Khattak & Saiti, 2021; Raut et al, 2017; Weber, 2012).…”

Impact of Corporate Environmental Responsibility on Firm’s Financial Performance: Moderating Role of Organizational Slack and Industry Competition

“…There is also no consensus in the literature with mixed results varying from positive, negative, or insignificant. Some factors are affecting the relationship between CER and financial performance and are ignored (Khattak & Saiti, 2021). In this research, some factors like organizational slack and industry competition will be focused on how they affect the relationship of CER and a firm's financial performance.…”

Are competition and performance friends or foes? Evidence from the Middle East banking sector

“…Hence, this study uses the Lerner index to measure the level of market power as an inverse measure of market competition. Lerner index has been widely used by several researchers to measure bank competition (Khattak and Saiti, 2020).…”

“…To derive the Lerner index, a translog cost function is estimated by restricted linear regression, linear homogeneity restrictions and imposing consistency (Khattak and Saiti, 2020). The cost is given as:…”