THE IMPACT OF SUSTAINABLE FINANCE PRODUCTS ON BANK LENDING PRACTICES: THE MEDIATING ROLE OF ESG INTEGRATION AND MODERATING EFFECT OF REGULATORY POLICIES IN EMERGING MARKETS

Abstract

The growing importance of sustainability in the financial sector has reshaped how banks align their lending practices with environmental, social, and governance (ESG) priorities. While sustainable finance has become central to policy and industry discourse, its practical impact on lending behavior, particularly in emerging markets, remains underexplored. Recent scholarship emphasizes the need to understand how ESG integration and regulatory frameworks shape the role of sustainable finance in banking operations, especially as financial institutions are increasingly expected to contribute to global goals such as the Sustainable Development Goals (SDGs). The purpose of this study is to investigate the influence of sustainable finance on bank lending practices, while examining the mediating role of ESG integration and the moderating effect of regulatory policies within an emerging market context. Stakeholder theory provides the guiding framework, suggesting that banks are accountable to multiple stakeholders who expect lending decisions to balance financial returns with broader social and environmental outcomes. A quantitative, cross-sectional research design was adopted, with data collected through structured questionnaires distributed to banking professionals. The measurement scales were drawn from validated instruments in prior literature. Data analysis employed SPSS for descriptive and inferential statistics and SmartPLS for structural equation modeling, enabling rigorous testing of direct, indirect, and moderating effects. The findings reveal that sustainable finance positively influences bank lending practices, with ESG integration acting as a significant mediator that strengthens this relationship. However, regulatory policies exert a negative moderating effect, suggesting that stringent or inconsistent regulations may constrain the positive impact of sustainable finance. These results highlight the critical importance of aligning sustainability strategies with operational ESG mechanisms while designing regulatory policies that support, rather than hinder, banks’ efforts to advance responsible lending practices.

Keywords: Sustainable Finance Products, Lending Practices, ESG Integration, Regulatory Policies and Emerging Markets