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Does ESG performance improve firm creditworthiness?

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  • Kanno, Masayasu

Abstract

This study examines whether ESG performance improves a firm’s creditworthiness. To this end, we develop two methodologies for logistic regression with or without two-stage least squares for selecting default risk factors pertaining to Japanese firms given their ESG scores. The results show that ESG performance contributes more to the prediction of a firm’s default risk for longer risk horizons. Notably, ESG-related activities do not necessarily contribute to a firm’s default risk reduction. Overall, this study provides effective credit risk analysis methodologies for related entities, such as ESG management firms, lenders, and investors.

Suggested Citation

  • Kanno, Masayasu, 2023. "Does ESG performance improve firm creditworthiness?," Finance Research Letters, Elsevier, vol. 55(PA).
    • Handle: RePEc:eee:finlet:v:55:y:2023:i:pa:s1544612323002660
    DOI: 10.1016/j.frl.2023.103894
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    References listed on IDEAS

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    Cited by:

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    2. Foley, Aoife M. & Heffron, Raphael J. & Al Kez, Dlzar & Furszyfer Del Rio, Dylan D. & McInerney, Celine & Welfle, Andrew, 2024. "Restoring trust in ESG investing through the adoption of just transition ethics," Renewable and Sustainable Energy Reviews, Elsevier, vol. 199(C).
    3. Fabrizio Ferriani & Marcello Pericoli, 2024. "ESG risks and corporate viability: insights from default probability term structure analysis," Questioni di Economia e Finanza (Occasional Papers) 892, Bank of Italy, Economic Research and International Relations Area.
    4. Daniel Macek & Stanislav Vitásek, 2024. "ESG risk analysis and preparedness of companies in the Czech Republic," International Journal of Economic Sciences, European Research Center, vol. 13(2), pages 38-54, December.
    5. Wang, Zhen & Tang, Pei, 2024. "Substantive digital innovation or symbolic digital innovation: Which type of digital innovation is more conducive to corporate ESG performance?," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1212-1228.
    6. Wang, Zhen & Chu, Erming & Hao, Yukai, 2024. "Towards sustainable development: How does ESG performance promotes corporate green transformation," International Review of Financial Analysis, Elsevier, vol. 91(C).
    7. Rahat, Birjees & Nguyen, Pascal, 2024. "The impact of ESG profile on Firm's valuation in emerging markets," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    8. Arianna Agosto & Paolo Giudici & Alessandra Tanda, 2023. "How to combine ESG scores? A proposal based on credit rating prediction," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(6), pages 3222-3230, November.
    9. Palmieri, Egidio & Ferilli, Greta B. & Stefanelli, Valeria & Geretto, Enrico F. & Polato, Maurizio, 2023. "Assessing the influence of ESG score, industry, and stock index on firm default risk: A sustainable bank lending perspective," Finance Research Letters, Elsevier, vol. 57(C).
    10. Liu, Dayong & Gu, Kaiyuan & Hu, Wenhua, 2023. "ESG performance and stock idiosyncratic volatility," Finance Research Letters, Elsevier, vol. 58(PB).
    11. Pistolesi, Francesco & Teti, Emanuele, 2024. "Shedding light on the relationship between ESG ratings and systematic risk," Finance Research Letters, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Environmental; Social; and Governance (ESG); Default risk; Logistic regression with two-stage least squares (2SLS);
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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