The role of Environmental, Social, and Governance ({ESG}) in predicting bank financial distress

We analyze the predictive power of Environmental, Social, and Governance (ESG) indicators to forecast bank financial distress using a sample of 362 commercial banks headquartered in the US
and EU-28 members states from 2012 to 2019. Our results demonstrate that ESG improves the
predictive capability of our model to correctly identify distress. Notably, ESG strongly reduces the
likelihood of misclassifying distressed/defaulted banks as healthy. Our model, which we estimate
using six alternative approaches, including traditional statistical techniques, machine learning
approaches, and ensemble methods, has implications for both practical implications by banking
sector supervisors, as well as literature on default prediction.