The impact of ESG disclosure on credit risk of commercial banks in Vietnam

This paper examines the impact of ESG (Environmental, Social and Governance) disclosure on the credit risk of commercial banks, employing the Generalized Method of Moments (GMM) approach based on a panel dataset of 27 Vietnamese commercial banks from 2018 to 2023. ESG disclosure is quantified using content analysis method, based on criteria outlined in Appendix 4 of Circular 96/2020-TT-BTC, issued by the Ministry of Finance The empirical results reveal that overall ESG disclosure, as well as the environmental (E) and governance (G) component individually, are associated with a significant reduction in credit risk, measured by the non-performing loan (NPL) ratio. In contrast, the study finds no statistically significant relationship between social (S) disclosure to credit risk. These findings contribute to the stakeholders' theory and asymmetric information theory by highlighting the risk-mitigating role of transparent ESG practices. These findings also imply that regulatory authorities should issue specific regulations on ESG disclosure and commercial banks should take a more proactive approach to integrating ESG requirements into their activities.