Transition versus Solvency. An ESG augmented model for SMEs

This study aims to investigate the potential trade-off between transition and solvency by developing a model that considers not only traditional financial ratios à la Altman but also incorporates ESG (Environmental, Social, and Governance) factors in distinguishing between solvent and insolvent firms. If such a trade-off does not exist, we hypothesize that integrating sustainability factors will not diminish the model’s ability to discriminate between solvent and insolvent firms. The findings reveal that incorporating ESG factors enhances the model’s capability to differentiate between the two categories of firms. Therefore, the inclusion of ESG information provides a predictive advantage to banks in terms of assessing solvency, aligning the objectives of financial stability and facilitating the transition towards sustainability. This paper contributes methodologically by offering a statistical tool to address missing sustainability data for insolvent firms.