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Bankruptcies define the ending of a firm and they have been increasing in recent years. Because of the tantalizing consequences bankruptcy gives rise to, it is in numerous parties’ interest to mitigate the risks. Several factors such as liquidity, leverage and profitability have an impact on the financial health of firms. With rise in interest and directive for sustainability and investing responsibly, higher ESG scores have shown to deliver benefits such as decreased bankruptcy risk. Europe is in the lead in sustainability practices and an essential sector for the European market is manufacturing which constitutes a significant part of the continent’s GDP. This sector is particularly sensitive to supply chains and is under increasing scrutiny from regulation and investors.

This gave rise to the first purpose of this study which was to examine if it is worth investing in ESG to minimize the risk of bankruptcy for European manufacturers. ESG performance was measured through Refinitiv Eikon’s ESG and pillar scores, while bankruptcy risk was measured through Altman Z-score. By looking at which individual pillars of ESG had the largest and smallest impact on bankruptcy risk, the study’s second purpose could be fulfilled. To conduct the study, 804 firms were studied over a 10-year period between 2013-2022, which resulted in 4,143 firm year observations. All analyses were done with four separate fixed effect regressions, controlling for both macroeconomic-, financial-, market- and size-related variables.

The results regarding the first purpose showed that the aggregate ESG score had a negative relationship with bankruptcy risk, which goes to show that increased investing in ESG activities can enhance firm stabilization among European manufacturers. Regarding the second research purpose, the regression results showed that the social dimension had the only significant impact in reducing bankruptcy risk. While the other pillars displayed similar directions, it was not possible to conclude on a relationship between the independent governance or environmental pillar score and bankruptcy risk. However, since the environmental and governance pillars are a part of the aggregate ESG score, the results still imply that the interplay of all the individual pillars can bring stability to firms. As such, the results showed support for two of the theories applied in the study, stakeholder and legitimacy theory, while contradicting the shareholder and agency theory. It is not merely the shareholder profit but rather the stakeholders’ interests that contributes European manufacturers staying afloat. ESG can thus be seen as a way to obtain legitimacy and build the firm stronger, rather than an occurring agency cost between agents and principals.