Impact of ESG Performance on Cost Efficiency: Evidence from the US Banking Sector

This paper examines the impact of Environmental, Social, and Governance (ESG) performance on the cost efficiency of U.S. banks from 2016 to 2023 using a one-step stochastic frontier analysis (SFA). The results reveal that ESG performance enhances cost efficiency, with environmental and governance components having significant positive effects, while the social component shows mixed results. An endogenous SFA model further confirms that all ESG dimensions positively affect efficiency, even after accounting for endogeneity. This paper contributes to the literature by providing recent evidence on the U.S. banking system, addressing endogeneity, and offering practical insights for bank managers and policymakers seeking to improve efficiency through ESG integration.