Digital transformation and ESG performance in emerging-market banks: asymmetric effects across environmental, social and governance pillars

What is it about?

This study investigates the influence of digital transformation on the Environmental, Social, and Governance (ESG) performance of banks in emerging markets. Employing a two-step Generalized Method of Moments (GMM) approach to address potential endogeneity issues, the research analyzes panel data from 250 banks across 25 emerging countries over the period 2012–2024. The study breaks down the data into three distinct periods: pre-COVID (2012-2019), during COVID (2020-2021), and post-COVID (2022-2024) to capture the unique effects of the pandemic on digitalization trends. Robustness tests, including the decomposition of digitalization into technological foundation and application, are also conducted to validate the findings. The results reveal that digital transformation enhances the social dimension of banks' ESG performance, notably by promoting financial inclusion. However, it has adverse effects on environmental and governance aspects due to increased energy consumption and the complexities of managing advanced technologies. The study highlights the importance of integrated strategies to balance the benefits of digitalization with its negative impacts. Practical implications include the need for tailored regulatory frameworks for policymakers to guide digital transformation while ensuring sustainability. Social implications emphasize the dual role of digitalization in reducing inequalities and exacerbating environmental challenges. This research contributes to the literature by providing robust empirical evidence on the ESG impacts of digitalization in emerging markets, offering valuable insights for aligning digital transformation with sustainable development goals.

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