Incorporating Sustainability Criteria into Credit Risk Management

Abstract

Abstract Does a commercial debtor's economic, environmental and social performance in terms of sustainability affect its credit risk rating? Does adding criteria aimed at assessing a lender's environmental, social or sustainability practices provide added value to traditional financial rating criteria? Many analyses have reported that a correlation exists between companies' environmental and their financial performance. We checked out the assertion that it ‘pays to be sustainable’ by analyzing the role that criteria pertaining to sustainability and environmental orientation play in the commercial credit risk management process. Our results show that sustainability criteria can be used to predict the financial performance of a debtor and improve the predictive validity of the credit rating process. We conclude that the sustainability a firm demonstrates influences its creditworthiness as part of its financial performance. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.

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