Strategic Sustainability: ESG’s Role in Shaping Credit Ratings in Global Banking and its Impact on Profitability and Efficiency

Abstract

This study examines the impact of Environmental, Social, and Governance (ESG) performance on the credit ratings, profitability, and operational efficiency of the world’s largest banks. Using an explanatory sequential mixed method, the research integrates quantitative analysis via Partial Least Squares Structural Equation Modeling (PLS-SEM) with qualitative content analysis of sustainability and annual reports of selected banks. The study explores the direct and moderating effects of ESG on asset turnover (AT), earnings before interest and taxes (EBIT), and credit ratings. Results show that ESG performance significantly improves credit ratings but negatively affects EBIT, indicating short-term profitability trade-offs. AT positively influences credit ratings, though reverse coding suggests a nuanced interpretation. ESG also moderates the AT–credit rating relationship, implying that high ESG performance may reduce the marginal benefit of operational efficiency on creditworthiness. However, ESG does not significantly moderate the EBIT–credit rating link. These findings highlight ESG’s complex role in financial evaluations and underscore the need for strategic alignment between sustainability initiatives and financial performance. The study advocates for integrating ESG metrics into credit risk models and refining profitability indicators to account for ESG-related externalities, positioning ESG as a strategic lever for enhancing institutional credibility and long-term resilience.