This chapter analyses the relationships between shadow banking, environmental, sustainability, and governance (ESG) measures, and profitability among both banks and non-bank financial institutions in South Africa. Using a panel of 15 bank and non-bank financial firms, the study estimates shock responses between shadow banking, ESG, and profitability of financial firms in South Africa. The study employs a parsimonious panel Bayesian Vector Autoregressive (BVAR) model to analyse the contemporaneous effects of each variable. We find that shadow banking has a positive but delayed impact on profitability of financial firms whereas ESG factors tend to decrease profitability in the very short-term. On the other hand, on impact, profitability increases ESG and decreases shadow banking. The findings of this empirical study are important for understanding the development of the shadow banking sector as an alternative or complement to the formal banking system in emerging markets. We recommend a balance between regulating shadow banking and allowing financial innovation; fostering an environment where shadow banking can complement traditional banking without compromising stability, and the design of policies supporting long-term financial stability through balanced ESG integration.