ESG risks and corporate viability: insights from default probability term structure analysis

Fabrizio Ferriani and Marcello Pericoli ()
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Marcello Pericoli: Bank of Italy

No 892, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We analyse the impact of ESG risks on the term structure of default probabilities of European non-financial corporations between 2014 and 2022. Our findings reveal that higher ESG scores reduce a company's inherent risk implicit in its probability of default, with more pronounced effects as the time horizon for default probability increases. The impact of ESG risks on corporate viability fluctuates over time and tends to intensify after major events relating to sustainability risks, such as the Paris Agreement or the COVID-19 pandemic. Additionally, our analysis shows that ESG considerations influence not only the objective or physical probability of default but also the credit risk premium required by investors. This aligns with heightened awareness and stronger investor concerns about sustainability, especially in recent years.

Keywords: ESG scores; default probability; term structure; credit risk premium (search for similar items in EconPapers)
JEL-codes: C22 C58 E31 E44 G12 (search for similar items in EconPapers)
Date: 2024-11
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