ESG Performance and Credit Risk in Latin America

Abstract

Previous studies suggest that the environmental, social and governance performance of companies helps to build a stronger image and reputation, thus providing better financial performance. However, the adoption of environmental, social and governance (ESG) practices as a tool for financial risk management is still little explored, especially in undeveloped economies. This research seeks to fill this gap by investigating whether the adoption of ESG practices reduces credit risk in publicly traded companies in Latin America. The results, obtained through an ordered logistic regression, considering the rating of the companies as a dependent variable and the indices of the ESG dimensions, obtained by the Refinitiv base, as explanatory variables, provide evidence that ESG practices are not being considered for the assignment of credit risk ratings from Moody’s and Fitch agencies. Thus, ESG practices are not helping to reduce credit risk, especially when we consider Argentine and Peruvian companies. The results are robust, even when considering the capital structure, profitability, leverage, size, and asset turnover. Thus, the article contributes by showing that even with the advances of credit rating agencies in adopt ESG indicators, it is still not possible to observe an impact on credit risk reduction, as evidenced by the literature.