South Korean companies with weak environmental, social and governance (ESG) scores face a significantly higher risk of default, a new study has found.
The research, published in the Financial Studies journal of the Korean Finance Association, examined 1,084 non-financial firms listed on the KOSPI and KOSDAQ markets from 2012 to 2023. Drawing on ESG data from Seoul-based research firm Korea ESG Standards Institute, it measured how negative incidents in environmental, social and governance categories, reflected as score deductions, affected firms’ subsequent default risk.
Firms with ESG score downgrades were more likely to face default in the following year, with social issues, including industrial accidents and consumer-related problems, showing the strongest statistical link to default risk. The authors said the results show that “ESG controversies can go beyond reputational damage and materially increase the risk of corporate default.”
The study also found that weaker board independence amplified the financial impact of ESG controversies, and that firms with higher foreign ownership saw default risk rise more sharply following ESG issues. Manufacturing companies appeared more exposed to these risks than service firms.
The findings align with a growing body of international research exploring ESG’s relationship with corporate risk. A recent study on mainland-listed Chinese, or A-Share, firms found that stronger ESG performance was associated with lower corporate debt default risk, suggesting that broader ESG engagement can help diversify funding sources and optimise market dynamics, though effects vary by firm characteristics and climate risk exposure.
Other academic work has linked robust ESG performance to reduced financial distress and lower systemic or stock price crash risk, while research reviews indicate that ESG and firm risk studies have multiplied in recent years, without a universal consensus on mechanisms.
The global push for better ESG data and transparency may also shape how such risks are priced. Regulators in markets including the United Kingdom and European Union are moving to strengthen oversight of ESG ratings providers to address methodological opacity and conflicts of interest, a development market participants say could affect how investors assess corporate sustainability and risk.
The Korean study’s authors said their work is among the first to quantify how negative non-financial performance translates into default risk for domestic listed firms, and that minimising ESG controversies is not only critical for competitiveness but fundamental to corporate survival.
South Korea has been actively expanding mandatory and semi-mandatory ESG disclosure frameworks at the corporate level, aligning national requirements with international standards, but its corporate ESG scores perform relatively low compared with major advanced Asian and Western markets.
According to the Korea Institute for International Economic Policy, South Korea Korean companies’ ESG scores ranked near the bottom when compared against firms from the US, Japan, China and other key Asian economies, suggesting slower or less comprehensive adoption of ESG practices in some areas.
