Do ESG Disclosure Scores Enhance Bank Stability and Financial Performance? Evidence From Explainable Artificial Intelligence Models

ABSTRACT This paper investigates the impact of environmental, social, and governance (ESG) disclosure score on the stability and financial performance of banking firms within the Gulf Cooperation Council region. With the increased public awareness regarding ESG initiatives, banks are under pressure to show more disclosure and compliance. Our study employs annual panel data from 2017 to 2024, using 33 banks operating in Gulf Cooperation Council region. Bank stability is measured by Z ‐score and the standard deviation of return on assets, while bank financial performance is measured using the return on assets and the return on equity. The Generalized Least Squares random effects model shows that higher ESG score leads to higher bank stability and financial performance. Our results are confirmed using advanced machine learning models. The explainable artificial intelligence model provides evidence that ESG disclosure can predict both bank stability and financial performance. The findings of this study have important practical implications. We contribute to the literature on sustainable finance, providing insights to policymakers, bank managers, and investors seeking to deal with the dynamic challenges in the banking industry.