Does the sustainability environment mitigate the adverse effects of inflation on bank performance? Evidence from developed and emerging economies

Abstract

Inflation poses significant challenges to bank profitability by increasing costs, weakening credit quality, and amplifying macroeconomic uncertainty, thereby altering banks’ lending and portfolio decisions. This study examines whether Sustainability development (ESG) mitigates these effects across 46 developed and emerging economies over the period 2002–2021. Using a dynamic panel estimation approach based on the Generalized Method of Moments (GMM), the analysis accounts for persistence in bank performance and potential endogeneity. The findings indicate that inflation positively affects both return on assets (ROA) and bank net interest margin (BNI), suggesting that banks adjust lending rates more rapidly than funding costs. ESG significantly enhances ROA but is not significant for BNI. Notably, the interaction between ESG and inflation is negative and significant, indicating that ESG attenuates the inflation–profitability relationship and serves as a stabilizing mechanism. These results highlight the strategic role of ESG in strengthening financial resilience under inflationary conditions.