ESG Factors and Firms’ Credit Risk

50 Pages Posted: 19 Dec 2022 Last revised: 11 Oct 2023

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: December 19, 2022

Abstract

We explore the relationship between credit risk and Environmental, Social, and Governance (ESG) dimensions 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). As potential explanatory variables, we consider an extensive number of raw ESG factors sourced from the rating provider MSCI. In the first stage, we demonstrate, using different SML methods such as LASSO and Random Forest, that a selection of ESG factors, in addition to the usual accounting ratios, helps in explaining a firm’s probability of default. In the second stage, we measure the impact of the selected variables on the risk of default. Our approach provides a novel perspective to understand which ESG factors may be associated with 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 (December 19, 2022). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 507, Available at SSRN: https://ssrn.com/abstract=4307197

Laura Bonacorsi

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 (Contact Author)

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

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