The Superiority of Local ESG Ratings in China’s Credit Risk Assessment: An Empirical Study Based on Default Distance

Abstract

Driven by the global trend of sustainability, environmental, social, and governance (ESG) factors have become an important indicator for assessing corporate sustainability and credit risk. However, ESG rating agencies in different regions may give different ratings to the same company due to differences in assessment methods and regional applicability. Taking Chinese A-share listed companies as the research object, this paper compares the effectiveness of Chinese local ESG ratings with international ESG ratings in credit risk assessment. By constructing a linear regression model with distance to default (DD) as the dependent variable, we find that the R² of China’s local ESG ratings is higher than that of international ESG ratings, providing greater significance and explanatory power in explaining corporate credit risk. This result suggests that local ESG ratings more accurately reflect the actual credit risk profile of Chinese firms, highlighting the importance of regional applicability in ESG ratings.