From ratings to resilience: The role and implications of environmental, social, and governance (ESG) performance in corporate solvency

Abstract

In an era marked by growing global turmoil, the strategic role of environmental finance and green investment in fostering sustainable development has never been more crucial. Particularly in regions beset by crises, enterprises find themselves at the forefront of efforts to develop resilience and stability. Leveraging insights from information effect theory and stakeholder theory, this study delves into an intricate interplay to unveil the impact of Environmental, Social, and Governance (ESG) performance on corporate solvency. In particular, the study investigates how ESG considerations influence short-term and long-term solvency metrics. Utilizing data from the listed constituent enterprises of the Stock Exchange of Thailand Sustainability Index (SETTHSI) during 2015 – 2023, the findings reveal a positive correlation between ESG performance and solvency at current levels, with no significant lag effect. Further analysis suggests that higher-polluting firms exhibit a stronger correlation between ESG performance and solvency compared to their non or lower-polluting counterparts. The findings remain robust across various assessments encompassing heterogeneity analysis by implementing group regressions and testing for endogeneity using the Propensity Score Matching approach, ensuring the reliability and applicability of the results which underscores the practical significance and theoretical relevance of the study, with profound implications for long-term enterprise resilience and broader social advancement.