Can the level of sustainability impact firms’ credit risk? A study on European firms

Abstract

Sustainability has become a topic of increasing relevance. This dissertation investigates the impact of sustainability on the credit risk of European firms over the period of 2005 to 2021, aiming to answer the research question of whether the level of sustainability can impact firms‘ credit risk. Firms' Total ESG Scores and their corresponding Pillar Scores are used as sustainability measures for the analysis. To proxy credit risk, S&P ratings, converted into default probabilities using European transition matrices, are employed, thereby circumventing the problem of non-equidistant scaling of credit ratings. The final dataset consists of 412 European firms.The multivariate regression results show that a higher level of sustainability can reduce a firm's credit risk. However, these results are conditional on the rating category. Only firms with an investment-grade rating seem to benefit from a higher level of sustainability. Yet the impact of sustainability on their credit risk is not particularly large. Furthermore, the results of a sectoral analysis show that sustainability only has an impact on credit risk in certain industry sectors and that not all firms in the respective industries benefit equally. Finally, a temporal analysis shows that the impact of sustainability varies over time.

Date of Award	5 Jul 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Mário Meira (Supervisor)