Essays in Sustainable Finance and Banking

This thesis, which consists of four essays, aims to empirically position Islamic banks’ contribution to sustainable structural change in light of global and regulators’ shifts towards more socially responsible conduct. Specifically, it undertakes to explore sustainable finance (SF) literature, systematically reviews studies that investigate banks’ contribution to sustainable economic system, examines the drivers of Islamic banks’ sustainability performance (SP), and analyses SP-Islamic banks’ profitability association.

The first essay performs a quali-quantitative analysis that combines both a bibliometric method with a content analysis process to derive the most important research constituents and identify the conceptual structure of sustainable finance literature. Our network map analysis shows the substantial relevancy of sustainable or green banks’ commitment to sustainable development. Nonetheless, its relatively low density i.e., sustainable bank* underlines the existence of relevant research gaps.

In the second essay, we draw on our bibliometric conclusions and conduct a systematic literature analysis to identify and appraise banks’ contribution to manage and mitigate climate and environmental endogenous risks. Banks’ intermediary role, and their capacity to create money and decide on whether to allocate credits to the economy provide banks with the ability to decarbonise firms’ balance sheets and reinforce their commitment to integrate sustainability indicators into their business strategies, and therefore, contribute to an orderly transition towards a low-carbon economy. In line with the study’s review protocol, the key research themes in extant literature are banks’ determinants of sustainable conduct, banks’ SP-financial performance association, customers and depositors’ responsiveness to banks’ sustainability practices, sustainable banks’ risk profile, and the mandatory calibration of “green” supervision, macroprudential regulations and monetary policies to further enhance climate-resilient investments.

In the third and fourth essays, we apply a two-step system GMM estimator to 32 Islamic banks to empirically examine whether institutional variables and CG structures may determine Islamic banks’ SP; and investigate whether Islamic banks’ commitment to SF Networks, their experience of sustainability disclosure, and the establishment of sustainability committee (SC) may positively moderate the SP-Islamic banks’ FP relationship respectively. The third essay’s results reveal an insignificant influence of SF regulations and Islamic banks’ membership in SF networks on their SP. This implies that the institutional environment does not explain Islamic banks’ SP.

Moreover, they document that the establishment of SC at board level and Islamic banks with better experience of sustainability disclosure achieve better SP. The fourth essay, on the other hand, report the existence of a significant but negative impact of SP on Islamic banks’ FP. This is compatible with the trade-off hypothesis and neoclassical economists’ position. Moreover, the results show that the establishment of SC, experience of sustainability disclosure, and Islamic banks’ membership in SF Networks do not significantly moderate the SP-Islamic banks’ profitability relationship.