ESG and corporate creditworthiness: an ordinal-logistic exploration of global markets

Purpose This paper aims to investigate whether the ESG performance, in addition to the standalone ESG pillars, i.e. environmental, social and governance scores, are associated with the corporate creditworthiness. Design/methodology/approach This study used ordinal-logistic regression using 400 nonfinancial firms extracted from Asia, Europe, the Americas and Oceania for the period 2008–2022. Findings The empirical findings reveal a significant positive relationship between the overall ESG score, each of its individual components and corporate creditworthiness, indicating that higher ESG scores contribute to better credit ratings. Additionally, the results show that larger firms, higher profitability, improved coverage ratios and stronger economic growth enhance a firm’s creditworthiness. To ensure the robustness of these findings, the authors conducted further tests using a two-step generalized method of moments (GMM) approach. Practical implications The findings highlight the growing importance of ESG performance for stakeholders in making informed decisions. They are also of significant relevance to credit rating agencies, capital market authorities and policymakers, as these groups play a crucial role in exerting institutional pressure on companies to adopt and improve their ESG practices. Originality/value To the best of the authors’ knowledge, this is the first study to include interest coverage and cash flow coverage ratios as predictors of a firm’s ability to service its debt and generate sufficient operating cash flows for debt repayment. A heterogeneity analysis is conducted using two subsamples investment-grade and speculative-grade firms to examine whether the relationship between a firm’s ESG performance and its creditworthiness holds across these two rating categories.