ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) PRACTICES AND FINANCIAL PERFORMANCE OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

Abstract

This study examines the effects of Environmental, Social, and Governance (ESG) practices on the financial performance of listed deposit money banks (DMBs) in Nigeria, using Tobin’s Q as a proxy for market-based valuation. The study covers a panel dataset of 12 banks over ten years from 2015 to 2024. The Environmental Practices Score (EPS), Social Practices Score (SPS), and Governance Practices Score (GPS) were employed to measure ESG performance, while firm size (FSZ) was introduced as a control variable. A panel regression model was adopted following the Hausman specification test. The empirical findings reveal that EPS has a negative and marginally significant effect on Tobin’s Q, implying that environmental practices, though essential for long-term sustainability, impose short-run costs that dampen market valuation. By contrast, SPS exerts a strong positive and highly significant influence on Tobin’s Q, indicating that social practices such as financial inclusion, customer protection, employee welfare, and community development are rewarded by investors through higher firm valuation. Governance practices (GPS) also demonstrate a positive and significant impact on Tobin’s Q, underscoring the importance of strong governance structures in enhancing transparency, accountability, and investor confidence. Firm size (FSZ), however, is found to be statistically insignificant, suggesting that market valuation depends more on the quality of ESG practices than on the scale of operations. The study concludes that ESG practices are key drivers of financial performance in the Nigerian banking sector, although their effects vary across pillars. While social and governance practices significantly enhance firm value, environmental practices currently reflect trade-offs between upfront costs and future benefits. These results lend support to stakeholder theory, agency theory, and trade-off theory. The study recommends that regulators strengthen ESG disclosure standards and provide incentives for environmental initiatives, while banks should embed ESG more strategically into their business models to achieve sustainable financial and market outcomes.