This research explores the relationship between banks’ business models and the Environmental, Social, and Governance (ESG) performance. We use a threshold regression model (Hansen, 1999) to identify an optimal threshold level in the business models of a sample of 80 European listed banks during the 2006 - 2021 period.

We find a significant and positive relationship between the ESG score and the level of capital and stock of deposits when these are above their optimal thresholds. This highlights how greater attention to sustainability policies is associated with banks that have stronger capital and rely more on deposits as a source of funding.

We also find that the ESG score is sensitive to income structure values below the optimal threshold, confirming that a greater focus on ESG risks aligns more closely with banks characterized by traditional banking activities.
The results highlight the importance of ESG practices in the bank’s management decisions and suggest that policymakers should encourage sustainable banking initiatives by integrating ESG factors into risk assessments, capital requirements, and financial incentives.