Assessing the Influence of ESG Factors on Credit Ratings using a TOPSIS Approach with Entropy-Based Weighting

Abstract

This research looks at how Environmental, Social, and Governance (ESG) factors are being used in credit rating assessments, particularly noting a move from strictly financial metrics—like profitability, leverage, and liquidity—to a broader inclusion of non-financial aspects. However, considering the current and emerging issues related to sustainability and ethical corporate governance, ESG factors are now regarded as important components of business risk and resilience. This study uses a multi-criteria decision-making (MCDM) approach based on the TOPSIS model, along with entropy weighting, to measure how ESG factors influence credit ratings for companies within the Dow Jones Industrial Average. A set of 14 indicators, covering both financial and ESG elements, is used to generate relative rankings, which are then compared with actual credit ratings. This study also examines the ESG practices of major companies, assessing how their environmental, social, and governance initiatives influence credit risk and align with sustainable industry standards.