<scp>ESG</scp> Prioritization: The Impact of Sustainability on Mitigating Bankruptcy Risk

ABSTRACT This research analyzes the intricate dynamics of how ESG factors influence bankruptcy likelihood within global listed companies. Utilizing a comprehensive dataset and a combination of fixed effect models along with a machine learning technique, the study confirms the assertion that corporations with robust corporate social responsibility practices are less likely to incur bankruptcy. The findings align with the stakeholder theory, advocating for companies to accord importance to all stakeholders' interests. Intriguingly, all three dimensions of ESG demonstrate a positive overall influence on the Z ‐Score, emphasizing their financial significance. However, a complexity emerges: while ESG positively impacts a company's Z ‐Score in the short term, this effect may disappear over longer time periods except for the governance factor which retains lasting relevance. Notably, workforce management, emissions control, and efficient overall management surface as critical variables in diminishing bankruptcy likelihood. This research underscores the intricate relationship between ESG and financial performance, highlighting the need for companies to prioritize authentic and enduring ESG initiatives harmonized with their strategic objectives and values, to foster stakeholder trust and promote long‐term financial stability.