The impact of research and development (R&D), environmental, social, and governance (ESG) factors on the performance of banks

Abstract

With the continuous development of digital technology that is exploding in the era of the fourth industrial revolution, investment in research and development (R&D) is considered an important strategy for businesses (including banks) to maintain competitiveness. R&D allows businesses to create new products that are difficult for competitors to copy. In addition, the process of creating new products, as well as the functions of the products that meet environmental protection standards, will support businesses in the process of sustainable development. Investment in R&D and ESG of banks aims to provide green financial products, in which green loan capital through the bank's green lending activities will be the green value chain for the products of businesses. This study investigates the impact of R&D and ESG in banks, mainly based on the cost of investment in R&D and the bank's ESG rating, on operational efficiency through the Tobin's Q, ROA, and ROE indicators. The research findings provide empirical evidence that when banks increase their R&D investment, Environmental, Social, and Governance (ESG) practices can help enhance operational efficiency, as evidenced by the increase in all financial indicators. Additionally, ESG practices can also increase brand value by positioning the bank as a "green" and "sustainable" bank, improve credit ratings, and bring economic benefits such as increased stock prices, improved access to capital, and enhanced competitiveness in the international market.