The impact of ESG factors on corporate credit risk: an empirical analysis of European firms using the Altman Z-score

This thesis assesses whether ESG factors enhance credit-risk evaluation, focusing on the European context. Initially, it outlines the European Union's regulatory framework, highlighting the EU’s leading role in promoting sustainable finance and the development of standardized ESG disclosures. It further examines the ESG ratings industry, emphasizing the methodological differences among major agencies and the implications of rating divergence for investors, companies, and credit analysis. The research delves into an empirical model to assess whether ESG indicators enhance explanatory power beyond traditional financial ratios, thereby promoting the inclusion of sustainability factors in credit risk assessments. The study estimates panel regressions that relate Altman’s Z-score, a proxy for default risk, with both ESG scores and its three pillars, while also accounting for standard financial controls. The analysis focuses on publicly listed European firms over the period 2020-2024 and examines sector-specific differences to determine where ESG factors offer valuable information. Results indicate that financial variables are the primary drivers of the Z-score, while EGS variables provide modest, sector-dependent incremental information. Overall, ESG factors usefully complement credit-risk assessment; however, the short sample period limits generalizability.