Integrating ESG factors in finance: insights from market competition, equity costs, and fintech innovation

Sustainable finance has emerged as a transformative force in addressing systemic challenges such as climate change, inequality, and economic instability. By directing capital toward initiatives that balance economic growth with environmental and social goals, it aligns finance with the United Nations Sustainable Development Goals (SDGs), redefining the sector’s role in creating long-term value for both business and society. At the core of this shift is the integration of Environmental, Social, and Governance (ESG) criteria into financial decision-making. ESG metrics enable stakeholders to assess corporate performance beyond financial returns, encompassing issues like carbon emissions, labor practices, diversity, and governance. The banking sector, as a cornerstone of financial systems, plays a critical role in advancing ESG integration both internally and through its lending and investment decisions. Despite growing attention, ESG implementation introduces complexities and raises pressing questions. How do market dynamics, such as competition, shape ESG engagement? Can sustainability commitments enhance resilience during economic crises? And how does FinTech innovation influence ESG practices in banking? This thesis explores these questions through three empirical studies at the intersection of ESG, financial outcomes, and innovation. The first study investigates how market competition influences ESG controversies in European banks, offering insight into how competitive pressures affect reputational risk and sustainability outcomes. The second examines whether ESG performance reduced the cost of equity for non-financial firms during the COVID-19 crisis, highlighting the role of sustainability in moderating risk under stress. The third evaluates whether FinTech-driven mergers and acquisitions improve ESG performance in banks, particularly across environmental and social dimensions. Drawing on stakeholder theory, institutional theory, and the resource-based view, this thesis develops an integrative understanding of how financial institutions respond to ESG pressures. Together, the studies reveal how market, crisis, and innovation dynamics shape ESG adaptation in the financial sector.