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

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  • Chen, Sheng-Li
  • Wang, Dan-ni
  • Chen, Hao-Wei

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.

Suggested Citation

  • Chen, Sheng-Li & Wang, Dan-ni & Chen, Hao-Wei, 2025. "The impact of ESG factors on credit ratings: An empirical study of European banks," International Review of Economics & Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:reveco:v:99:y:2025:i:c:s1059056025002199
    DOI: 10.1016/j.iref.2025.104056
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    1. Valente Fernanda & Chen Yujia & Calabrese Raffaella & Cowling Marc & Alessi Lucia, 2026. "Nature-adjusted probability of default for European small and medium enterprises," JRC Working Papers in Economics and Finance 2026-01, Joint Research Centre, European Commission.
    2. Verma, Geetanjali & Kashiramka, Smita, 2025. "Balancing ESG disclosures and cost efficiency: Implications for bank liquidity," Finance Research Letters, Elsevier, vol. 85(PC).
    3. Bao, Junsong & Yang, Liuyi, 2025. "Will ESG disclosure affect the green innovation level of SMEs?," Finance Research Letters, Elsevier, vol. 83(C).

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