The Impact of ESG Factors on the Financial Stability of Companies

Abstract

The objective – of this study is to determine the impact of considering non-financial ESG factors (environmental, social, and governance) on assessing the financial stability of companies.

Methods. The study utilizes quantitative analysis, including the Z-score and a modified Altman model for assessing financial stability. It is hypothesized that companies with high ESG ratings are less susceptible to bankruptcy risk, while ignoring environmental and social factors increases profit volatility and leads to financial losses. Furthermore, the study tests the hypothesis that ESG metrics can serve as indicators of potential financial crises, making them a valuable tool for corporate risk management.

Results. The scientific novelty of this study lies in its comprehensive analysis of the impact of ESG factors on the financial stability of companies using traditional financial methods. Unlike most studies, which examine ESG primarily from the perspective of corporate social responsibility or investment attractiveness, this study focuses on assessing the likelihood of bankruptcy using non-financial indicators. Using the Z-score allows us to identify patterns between ESG policies and financial instability risks.

Conclusions. Considering ESG factors is now an integral part of sustainable business. In addition to traditional financial risks, companies face threats related to environmental, social, and corporate governance aspects, which can lead to a decrease in their investment appeal and, ultimately, bankruptcy.