The impact of ESG on the cost efficiency of commercial banks-Evidence from Western European commercial banks

This study examines the impact of Environmental (E), Social (S), and Governance (G) activities on the cost efficiency of commercial banks in Western Europe in 2010-2020. The stochastic frontier analysis (SFA) method was employed to investigate the impact of E, S, G, and bank characteristic variables on cost efficiency. The findings reveal that commercial banks can improve their cost efficiency by conducting E, S, and G activities. Banks that implemented these practices tended to have relatively better cost efficiency than those that did not. Overall, the results of this study are consistent with the stakeholder hypothesis and present the first evidence of the interplay between cost efficiency and ESG activities in the banking industry in Western Europe.