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ESG performance and corporate financial distress: Evidence from China

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  • Sun, Jie
  • Zhao, Mengru
  • Li, Nengfei

Abstract

This study explores the impact of ESG performance on corporate financial distress. Firms with better ESG performance can effectively inhibit financial distress by alleviating financing constraints and reducing operational risks and agency costs. However, ESG rating divergence reduces this effect. Comparative analysis across different dimensions reveals that corporate governance dimension exhibits a stronger effect than other dimensions. The heterogeneity analysis finds that the mitigating effect of ESG performance on financial distress is significantly more pronounced in mature firms than in declining firms. Environmental dimension significantly reduces distress risk only for heavily polluting firms, with no effect on non-heavily polluting firms. Furthermore, ESG performance can improve the financial distress prediction performance of the random forest model. The overall ESG rating demonstrates greater predictive power than its individual dimensional ratings. These findings provide empirical evidence for enterprises to use ESG performance to prevent financial distress.

Suggested Citation

  • Sun, Jie & Zhao, Mengru & Li, Nengfei, 2026. "ESG performance and corporate financial distress: Evidence from China," Finance Research Letters, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:finlet:v:101:y:2026:i:c:s1544612326005672
    DOI: 10.1016/j.frl.2026.110038
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