Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267501 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. 036.2022
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
We study the relationship between the risk of default and Environmental, Social and Governance (ESG) factors using Supervised Machine Learning (SML) techniques on a cross-section of European listed companies. Our proxy for credit risk is the z-score originally proposed by Altman (1968). We consider an extensive number of ESG raw factors sourced from the rating provider MSCI as potential explanatory variables. In a first stage we show, using different SML methods such as LASSO and Random Forest, that a selection of ESG factors, in addition to the usual accounting ratios, helps explaining a firm's probability of default. In a second stage, we measure the impact of the selected variables on the risk of default. Our approach provides a novel perspective to understand which environmental, social responsibility and governance characteristics may reinforce the credit score of individual companies.
Subjects: 
Credit risk
Z-scores
ESG factors
Machine learning
JEL: 
C5
D4
G3
Document Type: 
Working Paper

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