Background: In response to growing sustainability demands, banks in the EU are increasingly expected to integrate Environmental, Social, and Governance (ESG) considerations into their operations. Regulatory changes and evolving stakeholder expectations have positioned ESG performance as a core element of strategic and financial decision-making within the banking sector.  

Purpose: The purpose of this study was to investigate the relationship between ESG scores and the financial performance of banks in the 27 EU member states. Guided by Stakeholder Theory and Institutional Theory, the research can provide insights into whether external pressures contribute to enhanced ESG performance and improved financial performance of EU banks.  

Method: A quantitative approach was applied using panel data regression analysis to examine 53 EU-listed banks over the period 2019-2023. ESG scores and financial data were sourced from Thomson Reuters Refinitiv Eikon. Bank performance was measured using Return on Assets (ROA), Return on Equity (ROE), and Tobin´s Q (TQ). The models assessed the effect of both the overall ESG score and its individual components, controlling for bank-specific and macroeconomic variables. 

Conclusion: The findings show a differentiated relationship between ESG scores and financial performance in EU banks. The overall ESG score is positively associated with ROE, while indicating no significant effects were observed for ROA and TQ. When examining individual ESG components revealed varied effects. Governance is positively associated with ROE and social performance is positively associated with TQ. By comparison, the environmental component showed no significant financial impact.