Evaluating the Impact of Sustainable Finance on Financial Stability: The Mediating Role of ESG in Pakistan's Oil and Gas Sector

Abstract

This study aims to evaluate the impact of sustainable finance on the financial stability of firms in Pakistan's oil and gas sector, with a particular focus on the mediating role of Environmental, Social, and Governance (ESG) factors. Sustainable finance, which integrates environmental and social considerations into financial decision-making, has emerged as a critical tool for fostering long-term corporate stability. In the context of the oil and gas sector, which is traditionally viewed as environmentally intensive, the adoption of sustainable finance practices is increasingly relevant. This research employs a quantitative approach, utilizing firm-level data from companies listed on the Pakistan Stock Exchange. The study examines the relationship between sustainable finance practices, as measured by the allocation of capital to environmentally and socially responsible projects, and financial stability indicators such as Return on Assets (ROA), Return on Equity (ROE), and Earnings Per Share (EPS). The mediating effect of ESG performance is analyzed to understand how these factors influence the relationship between sustainable finance and financial stability. Preliminary findings suggest that firms with higher ESG scores exhibit better financial stability, indicating that ESG factors play a crucial role in enhancing the positive impact of sustainable finance on firm performance. This research contributes to the growing body of literature on sustainable finance and offers practical insights for policymakers and corporate managers in the oil and gas sector in Pakistan. By demonstrating the importance of ESG integration in financial strategies, the study underscores the potential of sustainable finance to drive not only environmental and social outcomes but also long-term financial stability.

Keywords: Sustainable Finance, Financial Stability, ESG, Oil and Gas Sector, PSX