Sustainable Banking Through ESG Compliance: Investigating the Intermediary Role of Green Banking Innovation

In this age of global warming and growing climate risks, academics and policymakers are increasingly concerned about the sustainable performance of financial institutions. Limited research in emerging economies has explored how green banking innovation mediates the link between environmental, social, and governance (ESG) compliance and sustainable performance, creating a gap in understanding how ESG practices drive tangible sustainability outcomes. This study investigates the impact of ESG compliance on banks’ sustainable performance through the mediating role of green banking innovation, using survey data from 250 banking professionals analysed with Smart partial least squares structural equation modelling (PLS-SEM). The results reveal that ESG compliance significantly enhances both green innovation and the sustainable performance of banks. Furthermore, green innovation is found to partially mediate the relationship between ESG practices and banking sustainability. Moreover, green banking innovation is anticipated to have a strong positive impact on the sustainable performance of banks, emphasising its role as a critical enabler of sustainability in the financial sector. The analysis is expected to confirm that green banking innovation mediates the relationship between ESG compliance and sustainable performance, indicating that ESG-driven banks achieve better sustainability outcomes through innovative green practices. These findings align with prior literature that highlights that ESG integration and eco-innovative practices are critical drivers of long-term sustainability in the banking sector. The study provides practical insights for policymakers and banking leaders aiming to promote responsible banking through ESG-driven innovation.