The Influence of Sustainability on Credit Assessment for the Banking Sector: A Mediation Analysis

ABSTRACT This study investigates how environmental, social, and governance (ESG) scores influence credit ratings in the banking sector, using mediation analysis to explore their role as intermediaries between financial indicators and creditworthiness. Findings reveal that Environmental and Social scores positively impact credit ratings, while Governance does not play any role. Environmental and Social scores appear negatively influenced by financial metrics such as net interest margin (NIM) and return on assets (ROA), suggesting that banks are yet to consider sustainability as a profitable investment strategy. Indeed, when decomposing the effect of NIM on Credit Rating, via mediation analysis, the negative indirect effect of a lower Social score seems to be negligible when compared to the positive direct impact on Credit Rating. However, this is not the case for the Environmental score, which seems to capture all relevant information to form the Credit Rating. Overall, the commitment of rating agencies to account for sustainability factors seems to be supported, possibly triggering a shift in banks' long‐term investment strategies.