Assessing the Influence of ESG Score, Industry, and Stock Index on Firm Default Risk : A Sustainable Bank Lending Perspective

Using a European sample of 211 listed firms from 2013 to 2022, we analyze the mitigation effect on firms’ probability of default (PD) provided by the effect of ESG performance combined with firms’ industry or membership in stock indexes. The study implements a novel approach, monitoring both the short and long-term ESG effects on firms’ PD. The results show that improvements in environmental scores reduce default risk; while firms’ riskiness increases when we control for industry and stock index. From a banking perspective, we encourage a holistic approach integrating ESG scores into lending practices, adjusted by industry or stock index