ESG Performance and Credit Risk: Evidence From Chinese Manufacturing Companies

Abstract

This study investigates the effect of corporate environmental, social, and governance (ESG) performance on credit risk using a sample of manufacturing firms listed on China's Shanghai and Shenzhen A-share markets from 2009 to 2021. Employing fixed effects, the generalised method of moments, and instrumental variable models, we find that stronger ESG performance is significantly associated with lower credit risk, as measured by the distance to default. Mediation analysis reveals that this relationship operates primarily through enhanced profitability and improved external governance. In contrast, Tobin's Q acts as a negative channel, potentially reflecting market overvaluation and inefficiencies. ESG's impact also varies across firm types: the risk-reducing effect is most pronounced among non-state-owned enterprises (NSOEs), firms based in eastern provinces, and those in the growth or decline stage of the corporate lifecycle. Further analysis shows that environmental (E) and social (S) pillars drive credit improvements, whereas the governance (G) score has an insignificant effect. Our findings provide theoretical and empirical insights into the ESG–credit risk nexus, highlighting the importance of sector-specific, regionally sensitive ESG strategies in emerging markets.