Does green banking performance pay off? Evidence from a unique regulatory setting in Bangladesh

• Published date: 01 March 2021
• Author: Sudipta Bose,Habib Zaman Khan,Reza M. Monem
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/corg.12349

ORIGINAL ARTICLE

Does green banking performance pay off? Evidence from a

unique regulatory setting in Bangladesh

Sudipta Bose

1

| Habib Zaman Khan

2

| Reza M. Monem

3

1

Discipline of Accounting and Finance,

Newcastle Business School, University of

Newcastle, Sydney, NSW, Australia

2

Discipline of Accounting and Finance,

Canberra Business School, University of

Canberra, Bruce, ACT, Australia

3

Department of Accounting, Finance and

Economics, Griffith University, Nathan, QLD,

Australia

Correspondence

Sudipta Bose, Discipline of Accounting and

Finance, University of Newcastle, Sydney,

NSW 2000, Australia.

Email: sudipta.bose@newcastle.edu.au

Abstract

Research Question/Issue: A firm's choice to “go green”largely remains unregulated

worldwide. This study uses an institutional setting in Bangladesh experiencing a

green banking regulatory reform to examine whether banks' green performance

translates into improved financial performance and whether this is moderated by

banks' political connections.

Research Findings/Insights: Results based on a sample of 172 firm-year observations

from 2008 to 2014 suggest that green banking performance is positively associated

with a bank's financial performance. Further analysis suggests that cost efficiency

mainly drives this relationship. However, banks' political connections negatively

affect this relationship by counterbalancing green banking's non-financial benefits.

Our findings are robust to sensitivity tests that examine endogeneity concerns using

difference-in-differences (DiD) and propensity score matching (PSM) analyses and

Heckman's two-stage analysis.

Theoretical/Academic Implications: Most prior studies on corporate social responsi-

bility (CSR) were conducted in voluntary settings: however, our study utilizes a

unique regulatory setting in Bangladesh. With this exogenous shock to the banking

industry, the regulatory setting helped to alleviate endogeneity concerns arising from

voluntary motives behind CSR performance. To the best of our knowledge, this is the

first study to examine any link between green banking performance in a regulatory

setting and banks' financial performance.

Practitioner/Policy Implications: This study's findings suggest that sustainable busi-

ness practices promoted through regulatory intervention can improve financial per-

formance. A regulatory green banking initiative can be a win–win for all competing

stakeholders. Our findings have significant policy implications for governments and

regulatory agencies worldwide in the fight against global warming and climate

change.

KEYWORDS

banking industry, financial performance, green banking performance, political connections,

regulatory setting

Received: 4 March 2019 Revised: 8 October 2020 Accepted: 12 October 2020

DOI: 10.1111/corg.12349

162 © 2020 John Wiley & Sons Ltd Corp Govern Int Rev. 2021;29:162–187.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Sustainable business (SB) practices through green and corporate social

responsibility (CSR) practices are promoted today as key strategies in

the fight against global warming and climate change (e.g., International

Finance Corporation [IFC], 2017; KPMG, Global Reporting Initiative

[GRI], United Nations Environment Programme [UNEP], & Centre for

Corporate Governance in Africa, 2016; Porter & Reinhardt, 2007). To

date, SB practices (including green and CSR practices) have largely

remained unregulated worldwide. As they are voluntary in nature, dis-

closures of these practices are largely self-laudatory (e.g., Deegan &

Rankin, 1996). Moreover, the motivations for these practices can vary

substantially across firms, as well as having a confounding effect

through their relationship with a firm's financial performance (FP). For

example, Wu and Shen (2013; hereafter, WS) argue that, in a volun-

tary setting, the relationship between CSR and FP can be positive,

non-negative, and non-existent depending on the CSR motives.

In this study, we examine whether green banking

(GB) performance

1

is associated with improved FP in banks within a

unique regulatory setting in Bangladesh. The essence of GB lies in a

bank's focus on sustainability, resource efficiency, and environmental

friendliness in both its internal operations and external engagement.

Specifically, while CSR refers to a bank's behavior emanating from a

sense of accountability towards external stakeholders, GB requires a

primary focus on environmental sustainability both in internal opera-

tions and in its role of influencing clients towards sustainability.

The innovation of this study stems from its focus on a regulatory

setting, which is not the case in most prior SB studies. Unlike the vol-

untary settings of most CSR studies, our study is premised on the GB

regulatory setting in Bangladesh. Moreover, focusing on a single

industry potentially controls for drivers that are correlated with indus-

try characteristics and hence offers a better setting in which to tease

out any GB–FP relationship.

A related study is the work of WS; however, our study differs in

several dimensions. First, unlike the voluntary setting used by these

authors, a regulatory setting is used in our study to investigate the GB

performance–FP link. Thus, unlike WS's study, our study's findings are

unlikely to suffer from self-selection bias due to the voluntary nature of

CSR motives. Second, unlike WS, our study focuses on a single country.

Thus, our results are immune to institutional differences across sample

countries in cross-country settings. Third, WS focus on CSR activities,

while our study focuses on GB activities that go beyond CSR engage-

ment and are more proximal to banks' business models and operations.

In the next section, the differences between GB and CSR are discussed

in detail. Fourth, WS focus on FP measured in accounting-based terms

(i.e., return on assets [ROA] and return on equity [ROE]) whereas we

focus on a market-based measure (Tobin's Q).

2

The banking industry is our study's focus due to its growing

significance in the global economy over time. For example, domestic

credit to the private sector as a percentage of the world's gross

domestic product (GDP) grew from 52.03% in 1960 to 129.73% in

2018 (World Bank, 2020). Moreover, banks are coming under height-

ened scrutiny from social and environmental activists for their role in

financing large projects that often potentially contradict efforts

towards a sustainable, low-emission economy. For example, environ-

mental activists warned Australia's four largest banks against funding

the controversial Carmichael coal mine (Sky News, 2017). Similarly, in

2012, the ANZ Bank in Australia was forced to abandon financing a

controversial Tasmanian pulp mill project after intense lobbying from

environmental groups (ABC News, 2012). Examples of similar activism

against banks are available from Europe.

3

Green and environmental regulation is particularly important for

emerging economies as these economies are vulnerable to global

warming and climate change. Initiatives like green and environmental

policies and climate change policies undertaken by different policy

makers in emerging economies are very relevant and timely in

decarbonizing economies and limiting climate warming to below

2C (United Nations Framework Convention on Climate Change

[UNFCCC], 2016). Bangladesh, an emerging economy, was chosen as

our research setting for three reasons. First, Bangladesh is one of the

early GB adopters, with GB-related regulation introduced in the

country in 2011 (for a detailed discussion, see the next section).

4

Most countries adopting GB initiatives are emerging economies, with

the Bangladeshi experience likely to be informative for them. Second,

banks in Bangladesh have strong incentives to comply with GB regula-

tion as significant economic benefits are associated with compliance

(see next section). Third, as Bangladesh is potentially one of the worst

victims of global warming (Verisk Maplecroft, 2015; World

Bank, 2013, 2016), the people and corporations of Bangladesh are

likely to have a strong interest in policies and practices aimed at

mitigating the effects of both global warming and climate change.

Moreover, like other emerging economies/developing countries

affected by global warming, Bangladesh's access to the United

Nations (UN) Climate Fund will partly depend on its own initiatives in

climate mitigation and adaptation.

Arguably, the central research question addressed in our study is

why banks that “do good”can also do well financially.

5

In a regulatory

setting, such as the green regulation in Bangladesh, banks modify

internal operations and business models that either “do good”to the

planet or, at least, minimize environmental harm. Banks in this regard

do not necessarily have to incur sunk costs. Alterations in business

operations and the adoption of models can achieve cost savings, reve-

nue growth (through product innovations), and improvements in effi-

ciency and expediency at the firm level. These efforts by banks can

also be appealing to customers, stockholders, and other stakeholders.

For example, while online banking services require significant bank

investment in technology and personnel, their net effect can be cost

savings and improved banking services. In turn, GB may lead to cost

savings as the expansion of online banking services is likely to reduce

the need for large onsite operations and staff presence for face-to-

face customer interactions, while also reducing branch operating costs

including rent, electricity, furniture, and stationery. On the other hand,

online banking services may lead to non-financial benefits for banks.

For example, they may significantly improve customer satisfaction

through quick service delivery without the customer needing to travel,

as well as minimizing errors and omissions because of electronic

BOSE ET AL.163