CefES Working Papers

ESG Factors and Firms’ Credit Risk

by Laura Bonacorsi (Department of Social and Political Sciences, Bocconi University), Vittoria Cerasi (Corte dei Conti; CefES; O-Fire), Paola Galfrascoli (University of Milano-Bicocca), Matteo Manera (University of Milano-Bicocca; Fondazione Eni Enrico Mattei)


We study the relationship between the risk of default and Environmental, Social and Governance (ESGfactors using Supervised Machine Learning (SML) techniques on a cross-section of European listed companies. Our proxy for credit risk is the z-score originally proposed by Altman (1968). We consider an extensive number of ESG raw factors sourced from the rating provider MSCI as potential explanatory variables. In a first stage we show, using different SML methods such as LASSO and Random Forest, that a selection of ESG factors, in addition to the usual accounting ratios, helps explaining a firm’s probability of default. In a second stage, we measure the impact of the selected variables on the risk of default. Our approach provides a novel perspective to understand which environmental, social responsibility and governance characteristics may reinforce the credit score of individual companies.