Integrated Credit Validation Modeling with ESG: Incorporating Climate Risk and Sustainability Indicators in Credit Rating
Keywords:
Credit validation, ESG, Climate risk, Credit rating, Financial sustainabilityAbstract
This study aims to develop and test an integrated credit validation model that incorporates environmental, social, and governance (ESG) indicators alongside climate risk into corporate credit rating assessments. A quantitative applied research design was employed using balanced panel data from 165 firms listed on the Tehran Stock Exchange from 2015 to 2023. The dependent variable was the firms’ credit score, while the independent variables included the three ESG dimensions and a composite climate risk index. Fixed-effects panel regressions estimated via generalized least squares (GLS) were used to analyze the relationships and interaction effects. Results revealed that environmental, social, and governance indicators each exert a positive and statistically significant influence on credit ratings, while climate risk has a significant negative impact. The interaction analysis further indicated that climate risk moderates the ESG–credit rating relationship: under higher climate risk conditions, the positive impact of ESG on creditworthiness weakens. The integrated model achieved the highest explanatory power (R² = 0.489), outperforming traditional credit assessment models. Integrating ESG indicators and climate risk into credit evaluation enhances model accuracy and provides a more comprehensive and realistic assessment of firms’ financial sustainability. The proposed model offers practical value for credit risk management and the development of sustainable financial systems.
Downloads
References
Acharya, V. V., Berner, R., Engle, R. F., Jung, H., Stroebel, J., Zeng, X., & Zhao, Y. (2023). Climate Stress Testing. Annual Review of Financial Economics, 15(1), 291-326. https://doi.org/10.1146/annurev-financial-110921-101555
Afzal, A., Abaidi, J., Firdousi, S. F., & Noor, R. (2024). Climate Change and the European Banking Sector: The Effect of Green Technology Adaptation and Human Capital. Review of Accounting and Finance, 23(3), 394-418. https://doi.org/10.1108/raf-10-2023-0341
Agatha, I. R., & Mita, A. F. (2025). An Analysis of PT Bank CDE's Capacity to Implement the Climate Risk and Management Scenario (CRMS). Gijea, 3(1), 125-136. https://doi.org/10.38035/gijea.v3i1.375
Anastasiou, D., Ballis, A., Kallandranis, C., & Lakhal, F. (2024). Analyzing the Effects of Climate Risk on Discouraged Borrowers: Deciphering the Contradictory Forces. Risk Analysis, 45(1), 223-239. https://doi.org/10.1111/risa.15071
Arintoko, A., Badriah, L. S., Rahajuni, D., Kadarwati, N., & Priyono, R. (2024). The Impact of Macroeconomic Variables on Credit Risk: Evidence Regarding Sustainable Lending in ASEAN Countries. International Journal of Sustainable Development and Planning, 19(4), 1589-1597. https://doi.org/10.18280/ijsdp.190435
Batoon, A. J., & Rroji, E. (2024). Analyzing the Impact of Carbon Risk on Firms’ Creditworthiness in the Context of Rising Interest Rates. Risks, 12(1), 16. https://doi.org/10.3390/risks12010016
Campino, J. D. O. (2023). The Marginal Impact of Predicted Climate Risk Scenarios on Portfolio Credit Risk Stress Testing. Rmfi, 16(2), 124. https://doi.org/10.69554/zmbh7390
Céu, M. S., & Gaspar, R. M. (2024). A Review on Climate Change, Credit Risk and Agriculture. Rural Sustainability Research, 51(346), 38-49. https://doi.org/10.2478/plua-2024-0004
DoĞAn, M., Komath, M. A. C., & Sayilir, Ö. (2025). Credit Rating Prediction With ESG Data Using Data Mining Methods. Future Business Journal, 11(1). https://doi.org/10.1186/s43093-025-00490-1
Khemiri, M. A., & Nouaili, M. (2025). Non-Performing Loans in the MENA Region: How Green Growth Mitigates the Impact of Climate Risk. Asian Economic and Financial Review, 15(8), 1228-1243. https://doi.org/10.55493/5002.v15i8.5506
Kim, J., & Arroyo-Turcios, J. (2025). Conceptual Critical Success Factors Model on Infrastructure Sustainability Rating System for California Construction Projects. https://doi.org/10.31979/mti.2024.2324
Liao, F.-m. (2025). Dynamic Credit Rating Evaluation Algorithm for Customers Using Reinforcement Learning and Multi-Feature Weight Analysis. 116. https://doi.org/10.1117/12.3059656
Malone, L., Smales, L. A., & Liu, Z. (2025). From Extraordinary to Ordinary: How Moody’s Acquisition Made ESG Mainstream in Credit Ratings. Journal of Accounting Literature. https://doi.org/10.1108/jal-12-2024-0381
Martin, V. (2024). The Impact of Climate Change on the Financial Stability of the Republic of Serbia: The Case of the Mining Industry. Economic Themes, 62(3), 413-428. https://doi.org/10.2478/ethemes-2024-0022
Muzuva, M., & Muzuva, D. (2024). The Impact of Climate Change on Banks Loan Portfolios and Strategies for Effective Climate Risk Management. International Journal of Research in Business and Social Science (2147-4478), 13(6), 148-157. https://doi.org/10.20525/ijrbs.v13i6.3510
Nguyen, D. T., & Nguyen, V. (2025). Climate Risk and Credit Losses: A Global Perspective on Heterogeneous Impacts. Journal of Environmental Assessment Policy and Management, 27(04). https://doi.org/10.1142/s1464333225500103
Oguntuase, O. J. (2020). Climate Change, Credit Risk and Financial Stability. https://doi.org/10.5772/intechopen.93304
Popoola, G. O. (2025). Gender Effect of Access to Credit on Adoption of Climate-Smart Agricultural Practices in Oyo State, Nigeria. Journal of Agriculture Forestry and the Social Sciences, 21(2), 8-24. https://doi.org/10.4314/joafss.v21i2.2
Razak, L. A., Ibrahim, M. H., & Ng, A. (2020). Which Sustainability Dimensions Affect Credit Risk? Evidence From Corporate and Country-Level Measures. Journal of Risk and Financial Management, 13(12), 316. https://doi.org/10.3390/jrfm13120316
Rickman, J., Kothari, S., & Ameli, N. (2024). The ‘Hidden Cost’ of Sustainable Debt Financing in Emerging Markets. https://doi.org/10.21203/rs.3.rs-5246329/v1
Şeker, A., & İşgüven, M. K. (2025). The Nexus Between Biodiversity and Sovereign Credit Ratings: Global Environmental and Economic Interdependencies From a Sustainability Perspective. Sustainability, 17(11), 4977. https://doi.org/10.3390/su17114977
Shapoval, Y. (2024). Greening Monetary Policy: A Conceptual Framework. Scientific Bulletin of International Association of Scientists Series Economy Management Security Technologies, 3(1). https://doi.org/10.56197/2786-5827/2024-3-1-1
Tran, N., & Uzmanoglu, C. (2024). Climate Risk and Credit Ratings. The Journal of Financial Research, 47(4), 947-980. https://doi.org/10.1111/jfir.12388
Wadhwani, E. E. (2022). The Impact of Environmental Factors on Credit Ratings in Healthcare. Frontiers of Health Services Management, 39(1), 26-32. https://doi.org/10.1097/hap.0000000000000146
Xu, H. (2025). Government-Initiated Environmental Credit Rating and Corporate Climate Transition Risk Exposure. Sustainability Accounting Management and Policy Journal. https://doi.org/10.1108/sampj-12-2024-1428
Yébenes, M. O. (2024). Climate Change, ESG Criteria and Recent Regulation: Challenges and Opportunities. Eurasian Economic Review, 14(1), 87-120. https://doi.org/10.1007/s40822-023-00251-x
Yoffe, H., Raanan, N., Fried, S., Plaut, P., & Grobman, Y. J. (2023). Sustainable Urban Landscapes: A computation Framework for Enhancing Sustainability in Early-Stage Design. International Journal of Architectural Research Archnet-Ijar, 18(4), 870-894. https://doi.org/10.1108/arch-06-2023-0152
Yoon, S. J. (2023). Sustainability for Companies Doing ESG. Asia-pacific Journal of Convergent Research Interchange, 9(11), 291-309. https://doi.org/10.47116/apjcri.2023.11.24
Yu, J. (2024). The Superiority of Local ESG Ratings in China’s Credit Risk Assessment: An Empirical Study Based on Default Distance. Journal of World Economy, 3(4), 79-84. https://doi.org/10.56397/jwe.2024.12.09
Downloads
Published
Submitted
Revised
Accepted
Issue
Section
License
Copyright (c) 2025 Mohammad Qezelbash, Mohammad Mehdi Bagheri (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
