ESG and bank cost efficiency in Vietnam: The moderating roles of economic conditions and income diversification

Abstract

This study examines how environmental, social, and governance (ESG) factors influence the cost efficiency of banks, utilizing a dataset of 27 Vietnamese commercial banks over the period from 2014 to 2023. Employing a two-way fixed-effects estimation method, the findings reveal that social factors exert a significant adverse effect on bank cost efficiency, while governance practices contribute positively to improvements in bank efficiency. Additionally, further analysis indicates that favorable economic conditions can lessen the positive beneficial impact of governance practices on the cost efficiency of banks. The study also shows that income diversification strategies help reduce the detrimental effects associated with social practices, implying that banks with more diversified incomes can mitigate the negative influence of social activities on their efficiency. Interestingly, the study reveals significantly positive impacts of combined ESG and economic factors for banks with low levels of government and foreign ownership, respectively. These results emphasize the dynamic and complex role of ESG practices in shaping bank performance. They also suggest that ownership structure can critically influence the extent to which banks can leverage ESG activities to enhance their operational outcomes. This study offers valuable insights for banks, investors, and policymakers seeking to enhance efficiency by strategically implementing ESG, taking into account the moderating effects of economic environments and ownership characteristics.