ESG Factors and Firms’ Credit Risk

52 Pages Posted: 30 Nov 2022

See all articles by Laura Bonacorsi

Laura Bonacorsi

Fondazione Eni Enrico Mattei (FEEM)

Vittoria Cerasi

Corte dei conti; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Galfrascoli Paola

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Multiple version iconThere are 2 versions of this paper

Date Written: November 29, 2022

Abstract

We study the relationship between the risk of default and Environmental, Social and Governance (ESG) factors using Supervised Machine Learning (SML) techniques on a cross-section of European listed companies. Our proxy for credit risk is the z-score originally proposed by Altman (1968).We consider an extensive number of ESG raw factors sourced from the rating provider MSCI as potential explanatory variables. In a first stage we show, using different SML methods such as LASSO and Random Forest, that a selection of ESG factors, in addition to the usual accounting ratios, helps explaining a firm’s probability of default. In a second stage, we measure the impact of the selected variables on the risk of default. Our approach provides a novel perspective to understand which environmental, social responsibility and governance characteristics may reinforce the credit score of individual companies.

Keywords: Credit risk, Z-scores, ESG factors, Machine learning

JEL Classification: C5, D4, G3

Suggested Citation

Bonacorsi, Laura and Cerasi, Vittoria and Paola, Galfrascoli and Manera, Matteo, ESG Factors and Firms’ Credit Risk (November 29, 2022). FEEM Working Paper No. 36, Available at SSRN: https://ssrn.com/abstract=4289397 or http://dx.doi.org/10.2139/ssrn.4289397

Laura Bonacorsi (Contact Author)

Fondazione Eni Enrico Mattei (FEEM)

C.so Magenta 63
Milano, 20123
Italy

Vittoria Cerasi

Corte dei conti ( email )

viale Mazzini
Roma, Roma 00195
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Galfrascoli Paola

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
548
Abstract Views
1,611
Rank
62,837
PlumX Metrics