Impact of ESG Implementation on Credit Ratings and Financial Performance: A Sustainability Perspective

Abstract

The purpose of this paper is to analyse how the implementation of the ESG concept affects the credit rating and financial performance from a business micro-perspective. Environmental, social, and governance factors and risks, as components of the ESG concept, are challenging companies and pose sustainability risks to which companies react differently. The development of green financial instruments is an additional incentive for companies to commit to the process of green transition. Assessing ESG performance helps recognise strengths and weaknesses of the corporate sector in the process of contributing to global sustainability goals. Current sustainability achievements of companies can be analysed through ESG ratings. This research found that differences in rating agencies’ methods for defining ESG criteria and assessing ESG ratings do not ultimately lead to significant deviations in ratings. The implementation of the ESG concept in large companies (corporations) has no impact on profitability in the short term. Therefore, the effects of sustainability investments should be monitored over the long term. The research results indicate positive relationships between governance factors, ESG ratings, and the credit ratings of large companies. Based on the given results, it is concluded that investing in sustainability and ESG implementation has an overall positive impact on a company’s performance.