“Assessing the Influence of Sustainability on Financial Distress: An Empirical Study of Listed Companies in the UK"

Abstract

Recently, there has been significant interest in environmental, social, and governance (ESG) factors as a means to achieve sustainability and foster competitiveness among companies. Therefore, is the incorporation of ESG (Environmental, Social, and Governance) factors essential in preventing financial distress? The main objective of this research is to determine the effect of sustainability, specifically in terms of Environment, Social, and Governance (ESG) scores, and other firm-specific determinants on the Altman Z score within the London Stock Exchange (LSE). To achieve this objective, the study used a sample of 1,814 non-financial companies in the UK, comprising 31,847 observations from 2002-2021. The research employed the Altman Z score to measure financial distress. The sample was divided into financially distressed companies and non-financially distressed companies. The results reveal a significant difference between financially distressed and non-financially distressed companies regarding ESG. For financially distressed companies, poor governance practices, low profitability, and high leverage significantly contribute to financial distress, while tangibility and firm size negatively affect financial distress. For non-financially distressed companies, lower environmental scores pose regulatory risks, but higher social scores, profitability, and liquidity enhance financial stability. Therefore, higher profitability, social score, low debt ratio, and liquidity decrease the likelihood of financial distress for non-financial companies.