ESG risks and corporate survival.

Abstract

This research is the first attempt to examine the impact of corporate sustainability risks factors on its financial stability. By using S&P500 stocks data from 2019 to 2021 and calculating Altman's Z-score, we examined the influence of ESG (Environmental, Social, and Corporate Governance) risks score on the company survival chances. We documented diminishing total ESG scores of S&P500 stocks in recent years pointing out that companies pay attention to sustainability issues and invest resources to reduce them. We documented that Altman's Z-score is negatively influenced by E and S and not by G. These findings are very important since they prove for the first time that high environmental and social risks may reduce corporates' financial stability and rise their default risks incurring default costs. Moreover, high sensitivity of Altman's Z-score changes to S changes was found especially for relatively smaller firms. The result of this study emphasizes the importance of sustainability risk and especially social risk to a firm's survival chances and therefore mitigating those risks can dramatically improve corporates' financial stability.