Credit Risk in Sustainable Development: A Systematic Literature Review

Credit risk is one of the most important risks faced by lenders and can affect not only their financial health but also economic growth and financial stability. It is therefore crucial to assess the potential losses from credit risk as conservatively as possible and to manage it effectively. A systematic review of the academic literature was conducted to answer these questions. The results of the review showed that models that examine the relationship between sustainability and credit risk most commonly use the environmental factor as an indicator of sustainability (72% of the studies analysed). The Altman Z-score was the most used credit risk estimator in the reviewed studies. The second most popular estimate was bond and credit default swap spreads. In summary, the studies reviewed show that lending to more sustainable companies improves: The quality of the loan portfolio and reduces credit risk, leading to better credit ratings, and lower borrowing costs for the lenders themselves; lenders’ reputation, which makes it possible to attract a larger number of depositors and investors. However, the lender should consider not only the sustainability of the borrower but also the sustainability of the loan collateral, which is seen as a credit risk mitigant.