Environmental, social and governance and insolvency risk: evidence in the brazilian context
DOI:
https://doi.org/10.24023/FutureJournal/2175-5825/2024.v16i1.844Keywords:
ESG, Insolvency, Brazilian stock marketAbstract
Purpose: To analyze the influence of the Environmental, Social and Governance (ESG) set on the insolvency risk of publicly traded companies in Brazil.
Originality/Value: The study is justified by developing the literature on the influence of ESG on the risk of insolvency in the emerging context of the Brazilian stock market. In this country, there was an increase in the number of organizations that declared bankruptcy and had their requests for judicial recovery granted and granted between 2011 and 2019 (Serasa Experian, 2022). In response to frequent financial scandals occurring worldwide and pressure from authorities, Non-Governmental Organizations (NGOs) and stakeholders, an increasing number of companies are seeking to adopt social responsibility, environmental sustainability and appropriate governance practices as part of their strategy. In this sense, identifying variables that can help reduce financial difficulties is extremely important for investors and other interested parties.
Methods: The logistic regression method was used to highlight the results. The dependent variable was measured using the Z-Score (Citterio & King, 2023). The explanatory variables were ESG, Return On Assets (ROA), size, financial leverage and current liquidity. The data was collected in the Refinitiv Eikon database, considering the period 2002-2022. Financial companies and observations that did not present all the necessary data were excluded from the sample.
Results: The ESG variable (grouped or not) proved to be significant, showing a negative relationship with the risk of insolvency. It was found that the adoption of each of the practices mentioned, environmental (AMB), social (SOC) and governance (GOV), within the company reduces the chances associated with the risk of insolvency by around 1.01 to 1.03 times. The validity of the logistic regression model was verified using the Receiver Operating Characteristic Curve (ROC), in which a value of around 0.68 was found for the area under the ROC curve.
Conclusions: ESG (grouped or not) influences the level of solvency of companies, contributing to lower operational risk and better financial performance. The findings provide reflection that companies should invest in their environmental, social and governance structures, as they generate benefits from a long-term results perspective. To achieve this, organizations need to outline their strategies, incorporating discussions about ESG into their agenda, which are appropriate and corroborate with the proposition of viable operationalization actions in their sector of activity.
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