No News Is Good News: Corporate Social Responsibility Ratings and Fixed Income Portfolios
59 Pages Posted: 31 Mar 2017
Date Written: March 30, 2017
In response to the development of socially responsible investment (SRI) numerous ESG rating providers have been established. These companies provide ESG ratings and screens on companies. As investors are becoming more and more aware of the potential risk and opportunities associated with ESG factors, they use these ratings to identify ESG risks or opportunities that may not be captured through conventional analyses when constructing their portfolios. The question whether integrating ESG ratings into the investment process can increase performance has been investigated in stock portfolios. The results of some of these studies suggest that a strategy based on buying stocks with high ESG ratings and sell stocks with low ESG ratings can lead to abnormal returns (Kempf & Osthoff, 2007). This paper extends this literature by exploring this question in the area of fixed income by investigating if a trading strategy in bonds, based on ESG ratings on the issuing company, lead to abnormal returns. Using a sample of 5240 bonds from 425 US companies during the period January 2001 to December 2014 and ESG ratings provided by KLD, this paper finds that bonds issued by companies with no strengths, no concerns, and no controversies significantly outperform the market benchmark. This paper shows that no news is good news in ESG fixed income portfolios. These findings are particularly strong in times of market turmoil, and results are shown to be robust when controlling for differences in remaining maturity. Bonds are priced on the perception of riskiness, and no news appears to result in investors perceiving them as less risky over time while news seems to result in investors perceiving them as riskier.
Keywords: environmental social and governance (ESG), ESG performance, responsible investment, corporate social responsibility ratings, bond portfolios, fixed income portfolios
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation