Does ESG performance improve firm creditworthiness?

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.