The relationship between ESG scores and financial performance of Malaysia's domestic systemically important banks (DSIBS)

Chua, Qi Hen (2026) The relationship between ESG scores and financial performance of Malaysia's domestic systemically important banks (DSIBS). Final Year Project, UTAR.

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Abstract

Environmental, Social and Governance (ESG) considerations have become crucial for financial stability in the banking sector, particularly for Domestically Systemically Important Banks (DSIBs). However, empirical evidence on the relationship between ESG performance and financial outcomes for Malaysian DSIBs remains limited. This research explores ESG integration and financial outcomes among three Malaysian DSIBs: Maybank, CIMB Group Holdings, and Public Bank. It aims to identify the impact of overall ESG combined scores, alongside individual environmental, social, and governance pillar scores, on market-based and accounting-based financial performance. This study proposes a conceptual framework synthesized from Stakeholder Theory, the Resource-Based View (RBV), and Signalling Theory, utilizing the ESG scores as independent variables, Tobin's Q, Return on Assets (ROA), and Return on Equity (ROE) as dependent variables, and bank size, leverage, and GDP growth as control variables. This study uses a quantitative secondary-data research design spanning a 15-year period from 2010 to 2024. Data has been collected for 42 observations from LSEG Workspace, annual reports, World Bank and Department od Statistic Malaysia (DOSM), and has been analyzed using panel regression techniques. Descriptive statistics, correlation matrix, Variance Inflation Factor (VIF) for multicollinearity and Hausman specification tests have been checked to validate the use of the Fixed-Effects (FE) model. Robustness tests, including one-year time-lagged ESG scores and the exclusion of COVID-19 pandemic years, were also evaluated. The findings of this study in the fixed-effects model show that the overall ESG combined score does not have a statistically significant relationship with any financial performance measure. Furthermore, the environmental pillar score has a significant negative effect on ROA and ROE, while the social and governance pillar scores do not significantly affect financial performance, resulting in none of the 12 proposed positive hypotheses being supported. Policymakers and regulatory authorities should carefully design the timing of ESG compliance requirements to balance long-term climate risk management against short-term profitability compressions experienced by banks. Bank management and institutional investors should evaluate ESG initiatives with a long-term perspective, recognizing that the upfront costs and financial burden of environmental compliance currently precede future financial returns. Keywords: ESG, Financial Performance, Tobin's Q, Domestically Systemically Important Banks, Malaysia Subject Area: Finance

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