Incorporating environmental criteria into credit risk management in Bangladeshi banks

Abstract

Does the integration of environmental, social and sustainability criteria in commercial credit risk assessment processes create a benefit for lenders and does it improve the prognostic validity of the credit risk prediction? Some analyses have reported that a correlation exists between commercial borrowers’ sustainability performance and credit risks. We analyzed the role that criteria pertaining to sustainability and environmental orientation play in the commercial credit risk management process in Bangladeshi banks. Our results suggest that sustainability criteria improve the prognostic validity of the credit rating process. We conclude that the sustainability a firm demonstrates influences its creditworthiness as part of its financial performance. Consequently, lenders will benefit from implementing credit risk assessment models that integrate sustainability risks. By taking sustainability issues into account, banks will be able to avoid credit defaults on the one hand and to channel commercial loans to sustainability leaders on the other hand.