Page 513 - ISC PROCEEDINGS 21.4

ESG PERFORMANCE, INSTITUTIONAL QUALITY, AND BANK STABILITY IN
ASIA: THE ROLE OF GOVERNANCE IN THE DIGITAL ERA

Le Thanh Tam* , Tran Ha Huyen Chi , Nguyen Van Giang , Nguyen Anh Thu ,
1
2
3
4
Pham Linh Nhi , Nguyen Vu Trung Kien 6
5
1, 2, 3, 4, 5, 6 National Economics University, Hanoi, Vietnam.
(*E-mail: tamlt@neu.edu.vn)
ABSTRACT
The Asian banking sector operates in an increasingly digitalized and complex
environment. Within this context, ESG (Environmental, Social, and Governance), together
with institutional quality, has become a key foundation for maintaining financial resilience.
This study examines the relationship between ESG performance, corruption and bank
stability, using a sample of 144 listed banks across eight Asian countries over the period
2021–2024. Utilizing fixed-effects models with cluster-robust standard errors, the study
finds that stronger ESG performance and better corruption control are positively
associated with greater bank stability, while higher cost inefficiency weakens it. These
findings highlight the need to integrate ESG into prudential supervision and improve
institutional transparency.
Keywords: Bank stability; corruption; ESG performance; institutional quality.

1. Introduction
The banking sector in Asia is operating in an increasingly complex environment,
characterized by rapid technological advancements and the expansion of digital financial
services. While digitalization has enhanced financial inclusion and operational efficiency
(Klapper et al., 2025), it has also introduced new dimensions of competitive pressure and
operational volatility (Vives, 2019). In this context, banking systems face the dual
challenge of adapting to increasingly digitalized financial markets while preserving
stability.
Within this evolving framework, ESG performance has transitioned from a voluntary
disclosure practice to a strategic imperative. ESG practices may function as an important
buffer against risk by enhancing transparency and stakeholder trust (El Ghoul et al., 2011;
Azmi et al., 2021). Concurrently, at the country level, institutional quality, specifically
corruption control, stands as a fundamental macro-determinant of financial resilience.
While ESG addresses internal governance, the broader institutional environment
independently shapes the stability and discipline of the banking system.
Despite their significance, empirical evidence on the separate impacts of ESG and
corruption on Asian banking stability remains fragmented. This study addresses this gap
by examining how bank-level ESG performance and national corruption control
independently associate with the resilience of listed banks across eight Asian economies.
2. Theoretical framework and literature review
2.1. ESG and bank stability in the digital economy
Stakeholder theory provides a useful foundation for understanding the relationship
between ESG performance and bank stability. Rather than focusing solely on shareholder
value, firms are expected to balance the interests of multiple stakeholders to sustain long-
term performance (Freeman, 1984; Donaldson & Preston, 1995). In banking, where

512