ESG Performance and Financial Stability: The Moderating Role of Gender Diversity in MENA Banks

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ABSTRACT This study examines the effect of Environmental, Social, and Governance (ESG) performance on financial stability and investigates whether board gender diversity moderates this relationship in the banking sector. Using a panel dataset of 87 conventional banks from 12 Middle East and North Africa (MENA) countries over the period 2010–2024, we assess financial stability using the logarithm of the Z ‐score based on return on assets (LZROA). The empirical analysis relies on fixed‐effects and dynamic System GMM estimations, while robustness tests employ an alternative Z ‐score based on return on equity (LZROE). The results show that ESG performance has a positive and significant effect on bank stability, supporting the view that sustainability‐oriented practices enhance resilience through improved governance, transparency, and risk management. Gender diversity has a more nuanced role: while its direct effect is limited in the baseline fixed‐effects model, it becomes positive and significant in the dynamic specification, suggesting that board diversity contributes to stability over time. More importantly, the interaction between ESG performance and gender diversity is negative and significant, indicating that the positive association between ESG performance and financial stability becomes weaker as board gender diversity increases. Marginal effect and critical‐mass analyses further suggest that the positive effect of ESG on financial stability gradually declines as board gender diversity increases and that the weakening moderating effect may be associated with relatively low levels of female board representation rather than with a reduction in ESG effectiveness. This finding suggests that the relationship between ESG practices and gender diversity is more complex than the complementarity generally assumed in the literature and may reflect differences in the governance channels through which these mechanisms influence bank stability. The study contributes to the literature on ESG, corporate governance, and financial stability by providing evidence from an underexplored emerging region and showing that governance mechanisms do not necessarily reinforce one another but may influence bank resilience through distinct governance channels.

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