The impact of ESG performance on investment efficiency in Chinese and US banks: the moderating role of environmental uncertainty

This study investigates the relationship between environmental, social and governance performance (ESGP) and investment efficiency (INVE) in the banking sectors of China and the United States (US), with emphasis on the moderating effects of environmental uncertainty. The research uses panel data from 315 banks in China and the US from 2011 to 2022 and employs the two-stage generalized method of moments (2sGMM) approach to examine the hypotheses empirically. A two-stage least squares (2SLS) model is also used as a robustness check. It was found that environmental, social, and governance (ESG) performance positively affects investment efficiency, with a more potent effect observed in US banks. The results also indicate a ‘non-linear’ and ‘inverted U-shaped’ impact of ESG performance on investment efficiency, highlighting that while ESG practices initially enhance efficiency, excessive emphasis on them leads to diminishing returns. The study further highlights that environmental uncertainty significantly moderates the relationship, reducing investment efficiency, especially in the Chinese banking segment. The COVID-19 pandemic also moderated the ESG performance-investment efficiency nexus. The study contributes to the growing body of literature by providing valuable policy insights into the strategic importance of ESGP in enhancing investment efficiency while navigating uncertainties.