ESG and Corporate Credit Spreads

49 Pages Posted: 13 Jun 2018 Last revised: 30 Aug 2019

See all articles by Florian Barth

Florian Barth

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg

Benjamin Hübel

Friedrich-Alexander-Universität Erlangen-Nürnberg

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg

Date Written: June 28, 2019

Abstract

This study examines how credit spreads of European firms are related to their environmental, social, and governance (ESG) performance.Our results indicate that firms with the worst environmental performance exhibit 25 basis points higher credit spreads while the remaining firms share similar CDS spreads. This could be due to environmental-friendly business practices resulting in lower firm risk. The opposite applies to social performance. Here, 22 basis points higher credit spreads of the most social firms could indicate a waste of valuable resources leading to higher firm risk. In a time-series analysis, we construct ESG factors to assess the time-varying market valuation of ESG. These factors significantly add explanatory power when explaining credit spread changes and thus point to the time-varying market valuation of ESG being a determinant of credit spread changes. These findings indicate that investors may improve their assessment and management of credit risk when considering the ESG performances of firms.

Keywords: ESG, CSR, Credit risk, Credit Default Swaps

JEL Classification: G12, M14

Suggested Citation

Barth, Florian and Hübel, Benjamin and Scholz, Hendrik, ESG and Corporate Credit Spreads (June 28, 2019). Available at SSRN: https://ssrn.com/abstract=3179468 or http://dx.doi.org/10.2139/ssrn.3179468

Florian Barth

Friedrich-Alexander-Universität (FAU) Erlangen-Nürnberg ( email )

Lange Gasse 20
Nuremberg, 90403
Germany

Benjamin Hübel (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany
0049-911-5302405 (Phone)
0049-911-5302466 (Fax)

HOME PAGE: http://www.lfb.rw.fau.de/team/research-assistants/benjamin-huebel/

Hendrik Scholz

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

Lange Gasse 20
Lange Gasse 20,
Nürnberg, 90403
Germany

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