This study examines the effect of ESG Factors on Credit Risk Assessment of DFIs Loans in Nigeria. The objectives are to evaluate the effect of impact assessment and regulatory compliance on default rate of DFI’s loans in Nigeria, assess the effect of community engagement and involuntary resettlement on the default rate of DFI’s loans in Nigeria, examine the effect of transparency and disclosure practices on the default rate of DFI’s loans in Nigeria. A quantitative and qualitative research design was adopted, and primary data were collected from 135 respondents across selected DFIs. Data were analysed using descriptive statistics, correlation, multiple regression techniques, and thematic content analysis. The findings revealed high levels of agreement among respondents on the importance of ESG factors in credit risk assessment. Correlation results showed significant positive relationships between ESG dimensions and credit risk, while regression analysis indicated that ESG factors jointly explain 63% of the variation in credit risk. Governance factors emerged as the strongest predictor, followed by environmental factors, while social factors showed a significant inverse relationship with credit risk. These results suggest that ESG practices play a critical role in shaping lending outcomes and risk management in DFIs. The study concludes that effective integration of ESG factors enhances credit risk assessment and reduces loan default rates in DFIs. The study recommends among others the institutionalization of ESG frameworks in credit appraisal processes, strengthened governance and disclosure practices, and improved social and environmental risk management systems to enhance financial sustainability and developmental impact.
Keywords: DFIS loans, ESG factors, community engagement, credit risk assessment, transparency and disclosure practices
