The Impact of ESG Ratings on Companies' Risk Forecasting

Student: Dmitriy Olovyanishnikov

Educational Programme: Corporate Finance (Master)

Year of Graduation: 2024

This paper examines the relationship between the Sustainable Development (SD) practices implemented by a company along with its credit and idiosyncratic risk. ESG ratings, as well as separate estimates for E and S planes of the rating, are used as a proxy variable for SD. Utilising regression analysis, the statistical significance of ESG variables in both credit and idiosyncratic risk assessment models was confirmed, whereby higher ESG ratings correspond to lower risk exposures of the companies. The highest information value in the creditworthiness model was demonstrated by the aggregate ESG rating variable, as well as the E component separately. For idiosyncratic risk, the most useful variable was the S component of the rating. In addition to the significance of ESG variables, their inclusion in the specifications improves the forecast accuracy of both dependent variables and significantly reduces model errors.

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