Integrating Environmental, Social, and Governance (ESG) factors into credit risk assessment is the new frontier for credit risk management as regulators and investors increasingly require banks to channel loans to “sustainable” borrowers and ultimately foster sustainable growth. Our findings show that higher ESG awareness is strongly associated with better creditworthiness (proxied by the Altman Z‐score). We apply a two‐step methodology to 3331 companies from various industries and geographies in the 2000–2016 period which reveals that high ESG awareness scores are strongly and very significantly associated with a reduction in firm credit risk. We check the robustness by using the Probability of Default as a dependent variable and an instrumental variable constructed with a factor analysis. Our results support the appropriateness of the introduction of ESG awareness parameters in the creditworthiness assessment of borrowers.
The expected loss approach (ECL) defined by IFRS 9 replaced the old incurred loss approach (IAS 39) in the international accounting standard setter. In Europe, the IFRS 9 are accompanied by new regulatory frameworks (BCBS), opinion, technical standards (EBA) which do not always provide the same methodological and operational implications of the accounting standard setter. Many aspects of IFRS 9 have been studied, but this paper analyzes its interdependencies and overlaps with the credit risk framework for financial intermediaries (also Basel 3). Using a case study, the purpose of this paper is to investigate the ECL, its main impacts on coverage ratio of a loan’s portfolio. The main findings are: usually, the rules laid down for Stage 1 of IFRS 9 do not reduce the excess coverage produced on a portfolio in bonis; in the presence of impaired loans IAS 39 generates a lack of funds; the lifetime ECL (Stage 2 of IFRS 9) imposes excess of provisions because it does not consider the effect of coverage produced by expected premiums; for loan portfolios with short repayment times, the excess of provisions produced by IFRS 9 compensates the lack of coverage of the capital requirement. From the academic research perspective, this paper contributes to the literature on ECL model in several ways. First, it adds knowledge to the research on the relationship between Credit Risk Management framework and accounting standard IFRS 9. Second, it also links our findings related to ECL approach with potential implications for the financial sector, policymakers and regulators.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.