From ESG Adoption to Systemic Integration: A Structured Review and TBL-Aligned Framework for Sustainable Banking

Abstract

Banks are confronted with converging challenges. Climate-related financial risks, changes in regulation and growing stakeholder expectations have pushed many banks towards adopting ESG initiatives. ESG practices have become more common across the banking sector. However, their impact has not been uniform, and the extent to which banks have integrated them into their existing practices varies considerably. Reporting has advanced most rapidly while governance, risk management and capital allocation have received less attention. As a consequence, the banking sector appears more sustainable on paper than in practice. This paper seeks to address the question of how banks can transition from fragmented to integrated ESG practices. The research is based on a literature review of peer-reviewed studies published between 2000 and 2024, which used stakeholder theory, institutional theory, legitimacy theory and SF theory as analytical tools. In this respect, common themes, best practices, and challenges experienced by the banks were identified through the analysis. Four barriers were highlighted consistently in the literature. The lack of standardization in sustainability measurement coupled with underdeveloped governance and accountability structures, the pressure on profitability goals that runs counter to the goals of sustainability, and the absence of meaningful transformation of lending portfolios. Based on these findings, we propose a Triple Bottom Line aligned ESG Integration Framework. The framework brings together sustainability metrics, governance accountability, climate-related considerations in capital allocation and portfolio transformation. These elements are considered within the same organizational framework rather than being treated as separate activities. Three operational indicators accompany it the Portfolio Decarbonization Ratio, the Sustainable Financing Share and the Transition Readiness Index developed specifically to support consistent implementation across different banking institutions. We find that SF creates more value when banks embed it in governance, enterprise risk management and strategic capital allocation, rather than treating it primarily as a reporting obligation. Reporting alone is not enough. The proposed framework offers banks a practical way to build organizational resilience and support long-term sustainable development.

         Keywords: sustainable finance, triple bottom line, ESG integration, banking strategy, climate risk, portfolio transition