Greening the Ledger: Green Banking Practices and Financial Performance in Pakistan's Commercial Banking Sector

Abstract

Emerging financial institutions are under increased pressure to integrate environmental sustainability in core business. This paper reviews the empirical studies on the link between green banking practices and financial performance of commercial banks in a systematic way, especially the banking sector in Pakistan. The review shows that profitability (return on assets and return on equity) and market valuation (Tobin's Q) of green banking are positively related, with most empirical studies demonstrating this, based on 38 studies from a larger screened pool, operating primarily through operational efficiency, lower non-performing loan ratios and better stakeholder engagement. There are also some studies with small, though significant, negative short-term impacts, which were linked to high initial capital needs and variable regulation enforcement. Green financing and stakeholder engagement are two mechanisms which have the highest frequently found mediation between green banking practices and financial outcomes, while regulatory stringency is found to be one of the moderating factors that varies according to institutional context. On this synthesis, the paper proposes a conceptual framework and a series of testable hypotheses that would be useful for future panel data research specific to Pakistan and suggest the empirical design for such research. The paper provides a unified, conceptually coherent description of a body of literature that has been scattered over countries, institutional categories and performance measures.

Keywords: Commercial Banks, ESG, Financial Performance, Green Banking, Panel Data, Sustainable Development Goals (SDGs), Stakeholder Theory