Using Machine Learning to Detect Financial Distress From Sustainability Reports

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Authors: Songshan Qin, Mohamed Bakoush, Frank McGroarty
Cited by: 4
References: 56

Abstract

ABSTRACT This study examines the incremental predictive value of sustainability reports in forecasting corporate financial distress. We first construct a unique sample of 1220 sustainability reports produced by 244 firms from S&P 500 index between 2018 and 2022. We then employ natural language processing (NLP) techniques to extract key features from the textual content of corporate sustainability reports, introducing them as a novel input to financial distress prediction models. A suite of machine learning algorithms is then applied to assess predictive performance. Our results show that incorporating textual sustainability disclosures significantly improves model performance relative to using only quantitative variables. These textual reports outline the corporate strategies on sustainability, providing additional insights that enhance the prediction of financial distress. Among the tested models, Random Forest and XGBoost regressors exhibit superior performance. We also find that the materiality of specific ESG issues in predicting financial distress varies across sectors. Overall, this study offers a framework for integrating sustainability reports and ensemble learning into corporate credit risk assessment.

Fields of Study & Subjects

Financial Distress and Bankruptcy Prediction Auditing Earnings Management Governance Credit Risk and Financial Regulations

Publication details

Journal / source
Business Strategy and the Environment
Publisher
Wiley
Volume
35
Issue
5
Pages
7436–7458
Publication date
16 January 2026
Language
EN