ESG performance and Bank stability: The role of national culture and formal institutions

Why does ESG stabilize banks in some countries but not others? We argue that the inconsistent relationship between ESG performance and bank stability stems from a neglect of macro-level institutional contexts. While emerging research explores how national culture shapes ESG performance or how ESG performance affects liquidity and stability, no study integrates these perspectives to explain bank stability. We posit that national culture (as an informal institution) and formal institutions are critical, competing moderators that explain this heterogeneity. Using a global sample of 660 banks from 2002 to 2023, we find that ESG performance enhances bank stability, but predominantly in individualistic cultures. In contrast, high levels of uncertainty avoidance, power distance, and long-term orientation diminish this stabilizing effect. Strong formal institutions, however, positively moderate the ESG–stability relationship. Further analysis reveals that bank liquidity and funding costs act as key transmission channels. Our findings are robust to alternative model specifications and proxy measures. Sub-sample analyses indicate divergent patterns across the pre- and post-Paris Agreement periods and banks operating in developed vs developing economies. These results offer valuable implications for regulators and bank executives seeking to tailor ESG strategies to specific institutional and cultural environments.