Role of environmental, social, and governance rating data in predicting financial risk and risk management

Abstract

Traditional industrial enterprises are primarily high pollution enterprises and high energy consumption. The achievement of the “dual carbon” motive in Chinese economic activities and environmental protection plays a chief role incorporating the environmental, social, and governance (ESG) into the risk management system of industrial enterprises. However, the industrial enterprises participating in ESG rating account for 46.97% of the listed enterprises, and the industrial enterprises that pay attention to ESG information disclosure account for 35.77% of the listed enterprises. Is ESG rating essential for the enhancement of industrial enterprises? Based on the transformation and upgrading of industrial enterprises, this research investigates how the ESG rating and ESG information disclosure affect the financial risk of industrial enterprises in China. The findings suggest that: (1) In China for industrial enterprise ESG plays an essential role which results in decrease in financial problems of industrial enterprise. (2) ESG is influential on monetary risk of industrial enterprise, the quality of enterprise ESG information disclosure plays an important intermediary role. (3) The lagging of ESG rating by one period is significantly positive related to the financial risk of industrial enterprises, and the financial risk prediction of industrial enterprises can be effectively indicated by the ESG rating data, which exhibits a stronger correlation coefficient than the existing rating system.