ESG Performance and Bank Financial Risk: The Moderating Role of Economic Policy Uncertainty in Vietnam

Background and Objectives: Environmental, Social, and Governance (ESG) practices are increasingly integrated into banking activities as mechanisms to enhance financial stability and support sustainable development. In emerging economies such as Vietnam, however, ESG adoption remains uneven, and empirical evidence on its implications for bank financial risk is still limited. Moreover, banks operate under fluctuating macroeconomic conditions in which economic policy uncertainty (EPU) may alter the effectiveness of ESG performance. This study examines the impact of ESG performance on the financial risk of Vietnamese commercial banks, with particular emphasis on the moderating role of economic policy uncertainty. Methodology: The study employs panel data from 24 Vietnamese commercial banks over the period 2014–2024. Bank financial risk is measured using the Z-score (insolvency risk) and the loan loss provision (LLP) ratio (credit risk). ESG indicators are manually constructed from annual and sustainability reports based on 16 standardized criteria across environmental, social, and governance dimensions. A key contribution of this study is the construction of an Economic Policy Uncertainty (EPU) index derived from text-mining official policy documents issued by the State Bank of Vietnam and relevant ministries. Panel estimations including Ordinary Least Squares (OLS), Fixed Effects (FE), Random Effects (RE), and Feasible Generalized Least Squares (FGLS) are conducted, with FGLS serving as the preferred specification to address heteroskedasticity and autocorrelation. Key Findings: The results reveal heterogeneous effects of ESG dimensions on bank financial risk. Environmental performance is associated with lower Z-scores, indicating higher short-term financial risk, while social performance reduces loan loss provisions, suggesting improved asset quality. Governance does not exhibit a significant risk-mitigating effect under stable policy conditions. However, under heightened economic policy uncertainty, the ESG–risk relationship changes significantly. Environmental and social activities tend to amplify financial risk during periods of elevated policy uncertainty, whereas governance emerges as a key stabilizing factor that enhances banks’ resilience. Policy Implications: The findings highlight that ESG strategies should be aligned with prevailing macroeconomic conditions. During periods of high economic policy uncertainty, strengthening governance mechanisms is critical for risk management and financial stability. In contrast, environmental and social initiatives may yield more sustainable benefits under stable policy environments. Overall, the study underscores the importance of integrating ESG performance with coherent regulatory oversight and macroeconomic stability to support sustainable banking development in emerging economies.