The impact of environmental, social, and governance disclosure on credit risk: Evidence from South African firms

Background: Environmental, social, and governance (ESG) disclosure can influence a firm’s credit risk by improving transparency, strengthening risk management, and signalling stability to lenders and rating agencies. In South Africa, where information asymmetry, governance weaknesses, and macroeconomic volatility persist, understanding this relationship is important for promoting financial stability and advancing sustainable investment practices. Aim: This study investigates how ESG disclosure affects three dimensions of credit risk: probability of default (PD), cost of debt (COD), and credit model scores (CMS). It also evaluates whether individual ESG pillars exert distinct effects, thereby identifying which sustainability dimensions are most relevant in the South African context. Setting: The analysis covers 78 non-financial Johannesburg Stock Exchange firms from 2017 to 2023. Method: The study employs baseline ordinary least squares and fixed-effects models, and instrumental-variable two-stage least squares for PD and COD, and ordered probit models, with and without a conditional mixed-process framework, for CMS, allowing treatment of endogeneity. Results: Higher ESG disclosure lowers PD and improves CMS but does not affect COD. Governance drives reductions in PD, while environmental and social pillars strengthen CMS, indicating that ESG components operate through different credit risk channels. Conclusion: Environmental, social, and governance disclosure influences two credit risk measures, highlighting its relevance for credit evaluation in South Africa. Contribution: This study provides the first South African evidence on the ESG-credit risk relationship using different proxies and endogeneity-corrected models. It advances academic debates on ESG in emerging markets and offers practical insights for regulators, lenders, and investors integrating ESG factors into credit-risk evaluation.