Integrating Environmental, Social, and Governance (ESG) factors into credit risk assessment is the new frontier for credit risk management as regulators and investors increasingly require banks to channel loans to “sustainable” borrowers and ultimately foster sustainable growth. Our findings show that higher ESG awareness is strongly associated with better cred- itworthiness (proxied by the Altman Z‐score). We apply a two‐step methodology to 3331 companies from various industries and geographies in the 2000–2016 period which reveals that high ESG awareness scores are strongly and very significantly associated with a reduction in firm credit risk. We check the robustness by using the Probability of Default as a dependent variable and an instrumental variable constructed with a factor analysis. Our results support the appropriate- ness of the introduction of ESG awareness parameters in the creditworthiness assessment of borrowers.

Be good to be wise: Environmental, Social, and Governance awareness as a potential credit risk mitigation factor / Brogi, Marina; Lagasio, Valentina; Porretta, Pasqualina. - In: JOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING. - ISSN 0954-1314. - (2022).

Be good to be wise: Environmental, Social, and Governance awareness as a potential credit risk mitigation factor

Marina Brogi;Valentina Lagasio;Porretta
2022

Abstract

Integrating Environmental, Social, and Governance (ESG) factors into credit risk assessment is the new frontier for credit risk management as regulators and investors increasingly require banks to channel loans to “sustainable” borrowers and ultimately foster sustainable growth. Our findings show that higher ESG awareness is strongly associated with better cred- itworthiness (proxied by the Altman Z‐score). We apply a two‐step methodology to 3331 companies from various industries and geographies in the 2000–2016 period which reveals that high ESG awareness scores are strongly and very significantly associated with a reduction in firm credit risk. We check the robustness by using the Probability of Default as a dependent variable and an instrumental variable constructed with a factor analysis. Our results support the appropriate- ness of the introduction of ESG awareness parameters in the creditworthiness assessment of borrowers.
banks, credit, ESG risk, risk management, sustainability
01 Pubblicazione su rivista::01a Articolo in rivista
Be good to be wise: Environmental, Social, and Governance awareness as a potential credit risk mitigation factor / Brogi, Marina; Lagasio, Valentina; Porretta, Pasqualina. - In: JOURNAL OF INTERNATIONAL FINANCIAL MANAGEMENT & ACCOUNTING. - ISSN 0954-1314. - (2022).
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/1622861
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