ESG Risk Management, Sustainability-Oriented Firms and Financial Distress in the Financial Industry: an AI-aided approach

This study aims to explore the association between the level of ESG risk management in the financial industry and the odds of financial distress. We use a sample of 6160 firm-year observations from 2010-2019 of companies in the financial industry (including Banks, Insurance companies, diversified financials and other financial institutions) from 21 countries. An AI was utilized to generate the financial failure scores. A panel regression with random effects was utilized. A negative association between the level of risk management and the odds of bankruptcy. We observe a positive association between the sustainability strategy scores and the z-values, indicating lower odds of bankruptcy. This study contributes by bringing international evidence of the risk management-financial distress influx. It practically implies that management financial of companies can mitigate their financial instabilities through higher ESG risk management, including green loans, sustainability-linked loans and other climate financing; thereby safeguarding against any potential international fluctuations in global markets.