Can ESG Performance Mitigate Credit Risk?

Abstract

With the development and improvement of the banking and financial systems, people are increasingly concerned about the impact of non-financial factors on corporate performance and long-term value. Using a sample of Chinese A-shared listed commercial banks operating from 2013 to 2022, this study investigate the association between environment, social and government (ESG) combined scores and bank credit risk. By conducting descriptive tests, autocorrelation tests and mixed regression analysis,we find that a banks ESG performance is negatively associated with its credit risk. In addition, we took a closer look at banks' good performance on the environmental and governance pillars of ESG ratings and found that these two pillars can reduce credit risk more effectively than the social pillars. Our research provides new ideas for risk management and bank governance, helping banks to incorporate ESG scores into their daily management and risk monitoring, enabling banks to prevent risks more effectively and take effective measures.