Information asymmetry, ESG disclosure practices and performance of Asian islamic banks: evolution, convergence, and governance moderators

Abstract

Environmental, Social, and Governance (ESG) disclosure has become a strategic imperative for banks worldwide, yet little is known about how Islamic banks, rooted in Shariah principles of ethical governance and social justice, navigate this landscape. This study examines 30 independent fully fledged Islamic, publicly listed banks across Asian countries for the years 2018 and 2023 to (1) trace the evolution and convergence of ESG disclosure and (2) assess its impact on financial performance, market performance and risk, under varying governance structures. The study develops an Environmental, Social, and Governance disclosure index (ESGDI) of 44 items for each sample Islamic bank to assess its level of ESG practices from their annual reports and deployed paired t‑tests, ANOVA/Kruskal-Wallis, coefficient of variation analysis, and cross‑sectional OLS regressions with robust standard errors and interaction terms. Our findings reveal a marked increase in overall ESGDI from 0.46 in 2018 to 0.67 in 2023, with environmental scores rising most sharply (Δ=0.31) and governance scores remaining highest (0.57→0.73). Convergence metrics indicate a significant reduction in score dispersion post‑COVID. Regression results show that higher ESG disclosure is positively associated with profitability (ROA, ROE) and market valuation (Tobin’s Q), though its link to capital adequacy (CAR) is weaker. Crucially, board independence and institutional ownership strengthen the ESG-performance relationship, while gender diversity on boards amplifies the effect on return on equity. This study contributes to ESG and Islamic finance scholarship by disaggregating disclosure dimensions, documenting convergence trends, and elucidating governance contingencies. Practically, it offers regulators and bank executives actionable insights for developing Shariah‑aligned ESG frameworks and governance policies that maximize the value of sustainability reporting.