The Impact of ESG Factors on Corporate Credit Risk: An Empirical Analysis of European Firms Using the Altman Z-Score

Background: The increasing integration of Environmental, Social, and Governance (ESG) factors into financial decision-making has prompted debate over their impact on corporate credit risk. While many studies suggest that ESG performance may enhance firms’ resilience, empirical evidence remains mixed due to data inconsistency and methodological heterogeneity and differences in time horizons over which ESG effects materialise. Methods: The study investigates the relationship between ESG performance and credit risk using a panel of European firms from 2020 to 2024, a phase highly characterised by substantial macroeconomic shocks. The Altman Z-score serves as a proxy for default risk, while ESG data are sourced from Refinitiv Eikon. Four fixed-effects panel regressions are estimated: a baseline model using aggregate ESG scores, an extended model with financial controls, and disaggregated and sector-specific models. Results: The findings indicate that ESG scores—either aggregated or by pillar—show limited statistical significance in explaining variations in the Z-score. In contrast, financial variables such as solvency, liquidity, and cash flow ratios display strong, positive, and significant effects on credit stability. Some heterogeneous sectoral effects emerge: social factors are positive in technology, while governance has a negative impact in basic materials. Conclusions: ESG initiatives may not yield immediate improvements in default risk metrics, particularly over short and crisis-dominated periods, but could enhance financial resilience over time. Combining ESG information with traditional financial ratios remains essential; the results underscore the importance of consistent and high-quality ESG disclosure to reduce measurement error and enhance comparability across firms.