This study examines how third-party environmental, social, and governance (ESG) assurance and ESG performance influence credit risk. Using a European dataset of 1,448 firm-year observations, we find that third-party ESG assurance improves credit ratings indirectly by enhancing ESG performance, consistent with monitoring theory. In line with the risk mitigation view of ESG investment, we further document that superior ESG performance is associated with a lower credit risk. These findings have important implications for the ongoing debate on ESG and its independent assurance across academic, policy, and industry domains. The pronounced role of ESG performance in reducing credit risk is relevant not only for firms but also for credit rating agencies, who can incorporate ESG-related factors to capture a broader spectrum of risks and opportunities. Moreover, policymakers may leverage the monitoring function of third-party ESG assurance to strengthen self-disciplinary mechanisms within the corporate sector.
Abay et al. (Wed,) studied this question.