Dissecting the impact of the three E, S, G pillars on credit risk

This study explores the impact of Environmental, Social, and Governance (ESG) scores on the credit risk of Chinese A -share listed companies. Based on the empirical study, we analyse both the individual and combined effects of E, S, and G scores. Our findings indicate that improvements in ESG scores significantly reduce credit risk, particularly among green companies and those with high transparency. This conclusion remains robust after accounting for potential endogeneity bias through the application of the instrumental variable method. Furthermore, our study delves into how ESG scores impact credit risk. An increase in ESG scores reduces a company's debt default risk by decreasing the negative ESG-related news sentiment, enhancing stock liquidity, lowering financing costs, and improving the quality of internal controls. These insights contribute to a deeper understanding of ESG factors in risk management and offer practical guidance for companies seeking to enhance their ESG performance in relation to credit risk.