ESG and Corporate Credit Spreads
49 Pages Posted: 13 Jun 2018 Last revised: 30 Aug 2019
Date Written: June 28, 2019
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: Suggested Citation