The impact of ESG factors on credit ratings: An empirical study of European banks

Abstract

This paper explores the impacts of ESG factors on credit ratings assigned by Moody's, S&P, and Fitch to 106 European listed banks over the period from 2019 to 2023. The findings reveal that environmental factors exhibit a positive and significant influence on credit ratings from all three agencies, highlighting the integration of ESG factors into credit rating methodologies by major rating agencies. However, ESG Combined Score along with social, governance and controversial factors yield mixed results, indicating complexities in their measurement and their impact on creditworthiness of banks. The study emphasizes the critical need for standardized frameworks and enhanced transparency in ESG reporting to strengthen the integration of ESG factors into credit risk assessments of financial institutions.