The Impact of Sustainability Performance on Islamic Banks’ Financial Performance: The Moderating Effect of the Determinants of Sustainability Score

Despite the positively significant evidence of the sustainability performance (SP)-financial performance (FP) association across various sectors, the empirical results from the banking industry are still inconclusive. This study, therefore, seeks to investigate the SP-Islamic banks’ FP relationship over a sample of 32 Islamic banks drawn from nine key jurisdictions in Islamic finance industry for the period from 2016 to 2021 using GMM estimator. We collected SP data by applying weighted content analysis method on the sustainability indicators developed by the GRI framework for the financial services sector index. This standard provides relevant items which helps measure financial institutions’ economic, social and environmental sustainability impact. Our results underline the existence of significantly negative impact of overall sustainability performance, social and environmental sustainability scores on Islamic banks’ FP. Moreover, the results show that the establishment of sustainability committee, experience of sustainability disclosure, and Islamic banks’ adherence to sustainable finance networks’ specifications do not significantly moderate the SP-Islamic banks’ profitability relationship. A key implication of this study is the imperative to establish effective Islamic banks-policymakers’ collaborations. This may ultimately create a conducive environment for better governance of Islamic banks’ sustainability strategies and better management of their various stakeholders’ interests. This, in turn, may help Islamic banks leverage their sustainability experience, better align their strategies with other sectors’ sustainability guidelines, and consistently steer their financial resources towards more sustainable projects, which may ultimately trigger a positive SP-FP relationship.