ESG Performance and Corporate Bankruptcy Risk: A Pan‐European Analysis

Abstract

This study analyzes how Environmental, Social, and Governance (ESG) performance affects bankruptcy risk, using data from publicly listed firms across 17 European countries over a 21‐year period. We find that higher ESG scores are significantly associated with lower bankruptcy risk, as proxied by Z ‐score. In addition, we disaggregate ESG into its Environmental, Social, and Governance components, and find that the latter emerges as the strongest determinant of low bankruptcy risk, while social and environmental factors show weaker and more context‐dependent effects. Our empirical analysis also explores a potential channel through which ESG performance affects bankruptcy risk, and our findings indicate that ESG performance contributes to lower bankruptcy risk partly through improved operating performance (as proxied by ROA) and that its stabilizing effect is particularly stronger among larger firms. The findings highlight the critical role of ESG practices, particularly governance, in enhancing firm resilience and support the integration of ESG considerations into credit risk assessments.