The impact of ESG performance on the credit risk of listed companies in Shanghai and Shenzhen stock exchanges

Mengze Wu; Dejun Xie; Mengze Wu; Dejun Xie

doi:10.3934/GF.2024008

Green Finance

2024, Volume 6, Issue 2: 199-218. doi: 10.3934/GF.2024008

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Research article

The impact of ESG performance on the credit risk of listed companies in Shanghai and Shenzhen stock exchanges

Mengze Wu ¹,
Dejun Xie ^{2
,
,}

1.
School of Mathematics and Physics, Xi'an Jiaotong Liverpool University, Suzhou, China
2.
Faculty of Business, City University of Macau, Macau, China

Received: 13 February 2024 Revised: 17 March 2024 Accepted: 07 April 2024 Published: 12 April 2024
JEL Codes: C52, G32, Q01

A more precise and rigorous assessment of the impact of environmental, social, and governance (ESG) performance in business necessitates evaluating various firm characteristics. This study, focused on the ESG impact on enterprise credit risk, employed logistic models that incorporated the ESG rating index alongside other financial-related factors, including organizational structure, risk, and performance. The data were selected from all related listing companies in the Shanghai and Shenzhen stock exchanges. The results affirmed that (1) the risk of default decreased with improved ESG performance; (2) the return on assets, asset turnover ratio, leverage ratio, and operating income growth rate were the main financial factors affecting the default probability of enterprises; and (3) including ESG variables in the prediction model significantly improved the prediction accuracy of the model. The potential policy implications are presented in three perspectives. Businesses should prioritize developing good governance, fulfilling social obligations, and protecting the environment. Second, investors should integrate ESG ratings when making investment strategies. Third, the regulatory authorities are recommended to rapidly harmonize the ESG rating criteria and gradually develop the enterprise ESG information disclosure framework.
- ESG performance,
- enterprise credit risk,
- default risk,
- risk management,
- logistic model,
- financial indicators
Citation: Mengze Wu, Dejun Xie. The impact of ESG performance on the credit risk of listed companies in Shanghai and Shenzhen stock exchanges[J]. Green Finance, 2024, 6(2): 199-218. doi: 10.3934/GF.2024008

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Abstract

A more precise and rigorous assessment of the impact of environmental, social, and governance (ESG) performance in business necessitates evaluating various firm characteristics. This study, focused on the ESG impact on enterprise credit risk, employed logistic models that incorporated the ESG rating index alongside other financial-related factors, including organizational structure, risk, and performance. The data were selected from all related listing companies in the Shanghai and Shenzhen stock exchanges. The results affirmed that (1) the risk of default decreased with improved ESG performance; (2) the return on assets, asset turnover ratio, leverage ratio, and operating income growth rate were the main financial factors affecting the default probability of enterprises; and (3) including ESG variables in the prediction model significantly improved the prediction accuracy of the model. The potential policy implications are presented in three perspectives. Businesses should prioritize developing good governance, fulfilling social obligations, and protecting the environment. Second, investors should integrate ESG ratings when making investment strategies. Third, the regulatory authorities are recommended to rapidly harmonize the ESG rating criteria and gradually develop the enterprise ESG information disclosure framework.

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