ESG and Corporate Credit Spreads
50 Pages Posted: 13 Jun 2018 Last revised: 28 Aug 2020
Date Written: August 25, 2020
We investigate the implications of environmental, social and governance (ESG) practices of firms for the pricing of credit default swaps (CDS). Our evidence indicates that higher ESG mitigates credit risks of U.S. and European firms from 2007 to 2019. A one-standard-deviation improvement in ESG ratings is estimated to reduce CDS spreads by approximately 4%. The risk mitigation effect varies across ESG quantiles, which is consistent with opposing effects of growing stakeholder influence capacity and diminishing marginal returns on ESG investments. A path analysis reveals an indirect volatility channel that substantially amplifies the direct effect of ESG on credit risk.
Keywords: Corporate social responsibility (CSR); Enviromental, Social, Governance (ESG); Credit default swaps (CDS); Credit risk
JEL Classification: G12, G24
Suggested Citation: Suggested Citation