The nonlinear impact of ESG on firm default risk: evidence from Southeast Asia's firms

This study investigates the impact of environmental, social, and governance (ESG) performance on firm default risk, utilising a sample of 147 Southeast Asian firms from 2007 to 2022. We estimate the research model using the generalised least squares (GLS) approach. Our findings reveal a nonlinear relationship between ESG performance and default risk. Specifically, before reaching the ESG score threshold of 57.12, an increase in ESG is associated with a rise in default risk; beyond this threshold, higher ESG scores correspond to a reduction in firm default risk. Additionally, our analysis indicates that after the 2015 Paris Agreement, the importance of ESG factors in reducing default risk has become more pronounced, especially for SMEs. The U-shaped relationship between ESG and firm default risk is attributed to the firm's market value channel. Our results underscore the significance of effective ESG investment for enhancing financial stability, particularly in the context of evolving regulatory and market environments.