Sustainability and Financial Performance in Tanzanian Banks: Examining the Role of Environmental, Social, and Governance Factors and Influence of Digital Transformation

Abstract

This study investigates the impact of Environmental, Social, and Governance (ESG) practices and digital transformation on the financial performance of Tanzanian commercial banks. Using a Fixed Effect model to control for unobserved heterogeneity, the analysis covers data from 31 banks spanning 2014–2023. The findings indicate that ESG practices and digital transformation significantly enhance financial performance. A 1% increase in ESG practices improves return on assets (ROA) by 0.86% and Tobin’s Q by 0.56%, while a 1% rise in digital transformation expenditures enhances ROA by 0.12% and Tobin’s Q by 0.18%. Furthermore, the interaction between ESG and digital transformation yields synergistic performance gains, underscoring the importance of integrating sustainability with digital innovation. Larger banks and those with greater market share exhibit stronger performance, while economic growth positively influences the sector. This highlights the role of bank-specific characteristics and macroeconomic conditions in shaping financial performance. These findings extend Stakeholder Theory by illustrating how ESG practices align with diverse stakeholder interests and enrich the Resource-Based View by identifying digital transformation as a strategic asset. While the results are robust, the study is limited by its focus on Tanzanian banks, which may affect the generalizability of findings to other regions. The study offers actionable insights for policymakers and bank managers, advocating for regulatory support and investment in ESG and digital infrastructure to foster long-term value creation in the Tanzanian banking industry.