Using a European sample of 211 listed firms from 2013 to 2022, we analyze the mitigation effect on firms’ probability of default (PD) provided by the influence of ESG performance combined with industry and stock index membership. The results show that improvements in environmental scores reduce PD; while firms’ riskiness increases when we control for industry and stock index. From a banking perspective, we encourage a holistic approach integrating ESG scores into lending practices, adjusted by industry or stock index. Policymakers and regulators should support the widespread adoption of ESG metrics in assessing credit risk.
