Disaggregating ESG performance and implications of sub-pillar effects, ownership heterogeneity in the sustainable Indian banking system

Abstract

Abstract Growing climate challenges and regulatory pressures have propelled Environmental, Social, and Governance (ESG) principles to the forefront of banking strategy worldwide. This study empirically investigates the ESG performance across public and private banks in India over 2019–2023, identifying both leaders and laggers in sustainable adoption at the granular pillar level. ESG practices show a reduction in credit risk, while profitability and margin effects are ownership-contingent and emerge at the sub-pillar rather than the composite level, with notable differences among public and private banks. Findings were robust across estimation methods, but the Capital Adequacy ratio emerges as the dominant structural performance driver in the short run, with implications for regulatory design. The study proposes a concept-based ESG-AI BankTech framework with its integration in core banking operations to optimize capital allocation and enhance long-term value creation, which can be tailored to emerging economy conditions. The findings offer valuable insights for practitioners, regulators, management, and investors, highlighting the pivotal role of mainstreaming sustainability efforts in the banking ecosystem.