Impact of carbon emissions on default risk in east asia: The moderating role of ESG performance and green initiatives

Abstract

This study examines how carbon emissions affect the default risk of companies in East Asia, with a focus on the potential moderating role of Environmental, Social, and Governance (ESG) performance. Using data from 3,946 non-financial firms listed in six East Asian countries between 2018 and 2022, we analyze both direct and indirect carbon emissions' impact on the likelihood of default, measured by the Altman Z-score. Our research shows that companies with higher carbon emissions are more prone to financial trouble, increasing the chances they’ll default. However, those with stronger ESG practices seem to manage these risks better. This underscores the need for businesses to prioritize sustainability, not just for ethical reasons, but also to reduce financial risks. Specifically, firms in high-emission sectors can lower their default risk by focusing on improving their ESG performance. These insights offer practical advice for businesses, investors, and policymakers as they navigate the economic challenges posed by climate change