No News Is Good News: Corporate Social Responsibility Ratings and Fixed Income Portfolios

59 Pages Posted: 31 Mar 2017  

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin; Stockholm School of Economics - Mistra Financial Systems (MFS)

Marcus Nilsson

Sociovestix Labs - a DFKI spin-off

Date Written: March 30, 2017

Abstract

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

Hoepner, Andreas G. F. and Nilsson, Marcus, No News Is Good News: Corporate Social Responsibility Ratings and Fixed Income Portfolios (March 30, 2017). Available at SSRN: https://ssrn.com/abstract=2943583 or http://dx.doi.org/10.2139/ssrn.2943583

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

Stockholm School of Economics - Mistra Financial Systems (MFS) ( email )

MISUM
Box 6501, SE-113 83 Stockholm
Sweden

Marcus Nilsson (Contact Author)

Sociovestix Labs - a DFKI spin-off ( email )

c/o German Research Center for
Artificial Intelligence (DFKI)
Kaiserslautern, 67663
Germany
07525813580 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
212
rank
133,615
Abstract Views
837
PlumX