The Transformation of Investment Banking under the Environmental, Social, and Governance (ESG) Concept: A Comparative Study between Chinese and Foreign Investment Banks
Abstract
Environmental, Social, and Governance (ESG) disclosure has become increasingly important in capital markets, yet its profitability implications for investment banks remain underexplored, particularly in comparative settings. This study examines the dynamic and asymmetric relationship between ESG disclosure and financial performance using an unbalanced panel of 24 investment banking institutions, comprising 12 Chinese and 12 foreign banks, over 2015–2025. ESG disclosure is measured by a report-based ESG Disclosure Index (EDI), while profitability is represented by Return on Assets (ROA). The retained panel contains 252 institution-year observations, with 228 observations used in the dynamic estimations. Fisher-ADF and Fisher-PP panel unit-root tests are first applied to assess stationarity. The analysis then employs Dynamic Fixed Effects (DFE) panel ARDL(1,1) and NARDL(1,1) models, together with Wald tests and robustness checks. The ARDL results show a significant positive model-implied long-run EDI effect of 0.0269 (p < 0.001). The contemporaneous EDI coefficient is positive but insignificant (β = 0.0091, p = 0.118), whereas the one-year-lagged coefficient is positive and significant (β = 0.0126, p = 0.002), indicating a delayed short-run association. The NARDL results reveal significant long-run asymmetry: cumulative disclosure improvements have a positive effect of 0.0219 (p = 0.013), while cumulative deterioration has a larger negative effect of -0.0320 (p < 0.001). The long-run symmetry Wald test rejects equality (χ² = 10.903, p < 0.001). However, the cross-group Wald test finds no significant difference between Chinese and foreign long-run EDI effects (χ² = 0.164, p = 0.686). These findings indicate that ESG disclosure is financially relevant mainly through delayed and long-run channels and that preventing deterioration in disclosure quality may be especially important for investment banks. Keywords: ESG disclosure, Investment banking, ESG Disclosure Index (EDI), ARDL-NARDL, Financial performance