Exploring the Relationship Between ESG Practices, ESG Risk Factors and Profitability of Financial Institutions: Triangulation of Methodological Approaches

Although interest in ESG is growing, many research questions remain unresolved. The paper aims to illuminate three important issues using empirical evidence: how ESG indicators are aggregated, the nature of the causal relationship between ESG practices and ESG risk factors, and whether there is an interactive effect of ESG practices and risk factors on profitability. Using a sample of 294 European financial institutions listed in the ESG Book database, the study applies several quantitative data analysis methods, including multiple linear regression, necessary condition analysis, partial least squares structural equation modeling, regression moderation analysis, and multigroup analysis. The main theoretical and practical contribution is the application of the logic of necessity, which shows that, without the development of governance practices, financial institutions cannot achieve a high return on assets (ROA). The additional value lies in recognizing the moderating role of ESG risk factors: when environmental risks are high, improving governance practices will not affect the realized ROA. The methodological contribution is demonstrated by applying statistical techniques that have not yet been widely used in sustainable finance. The main limitation of this study is its cross-sectional design.