The influence of ESG performance on credit risk and financial distress: an empirical study on Taiwan corporate sustainability

Abstract

ABSTRACT The United Nations has urged global corporations to integrate environmental, social, and governance (ESG) metrics into their operational standards. Reflecting the worldwide shift towards sustainable development, the Taiwanese government has initiated a serious of programmes to highlight corporate adherence to ESG principles, implementing a range of policies aimed at fostering corporate sustainability. This research delved into the potential of enhancing ESG performance, rooted in the ethos of sustainable management, to mitigate credit risk and circumvent financial instability. The findings suggest that, with the exception of carbon emissions and water consumption, enhancements in the majority of ESG performance indicators can mitigate credit risk and financial instability. Furthermore, companies exhibiting strong ESG performance tend to receive favourable credit risk ratings and avoid financial instability. Additionally, the study underscores the advantages of ESG performance in bolstering competitiveness and motivating companies to progress towards sustainable development objectives. As a result, governmental bodies ought to establish a robust framework for ESG indicators and regulatory protocols. The insights gleaned from this study can offer valuable guidance to business entities and stakeholders in their decision-making processes.