This paper analyses the impact of environmental, social and governance sustainability criteria, proxied by ESG scores, on the probability of default of European non-financial corporations between 2014 and 2022. Moreover, it examines the impact of these criteria on the risk premium required by investors to hold the financial assets issued by firms.
Firms with better sustainability profiles have a lower probability of bankruptcy. The effect is larger as the time horizon for default probability increases and amounts to up to one-sixth of the average probability of default. The impact of sustainability criteria on the probability of corporate default and on the risk premia demanded by investors varied over time; it has especially increased since the Paris Agreement and the COVID-19 pandemic crisis.
