From ESG disclosure to credit risk: evidence from European firms

Purpose This study aims to examine the impact of environmental, social and governance (ESG) disclosure on credit risk at the firm level, focusing on companies listed in the Euro Stoxx 50 index. Specifically, the study evaluates whether transparent and standardized sustainability reporting improves financial stability, as measured by Altman’s Z-Score. Design/methodology/approach A two-way fixed effect panel regression model was applied to annual data from 2005 to 2024. ESG disclosure indicators were analysed alongside financial variables. One-and two-year lagged models were used to assess long-term effects. Hausman and F-tests confirm the robustness and suitability of the model. Findings The results reveal a statistically significant lagged relationship between ESG disclosure and credit risk. Several ESG indicators are linked to improved creditworthiness, as evidenced by higher Altman’s Z-scores. The effects are strongest with a two-year lag, suggesting that ESG reporting builds financial resilience over time. Since the Paris Agreement, the importance of ESG disclosures has increased, underscoring their growing role in credit evaluations. Research limitations/implications One limitation of the study is that ESG disclosure data on the Bloomberg Terminal is only available annually, resulting in a short time series and few observations per company. Additionally, the lack of a long time series for sustainability-related indicators complicates the study, especially when considering the delayed impact of reporting on credit risk. The study is also limited by its failure to consider crisis periods, such as the 2008–2009 global financial crisis and the 2020–2021 pandemic, which may have affected the importance of credit risk assessment and ESG disclosure. Originality/value This study presents the direct, long-term impact of ESG disclosure on credit risk. By focusing on large European firms and using fixed effects modelling, the study emphasizes the vital role of standardized ESG reporting in enhancing transparency, investor confidence and the quality of risk assessments in financial markets.