ESG and Corporate Credit Spreads

59 Pages Posted: 13 Jun 2018 Last revised: 11 May 2020

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: April 30, 2020

Abstract

We analyze the implications of environmental, social and governance (ESG) practices of firms for the pricing of credit default swaps (CDS). Building on Merton (1974) and literature on ESG and firm risk, we provide a simple theoretical framework for the relationship between ESG and credit risk. Our empirical results indicate a significant risk mitigation effect of ESG on credit risk for U.S. and European firms from 2007 to 2019. A one-standard-deviation (~25%) improvement in ESG is estimated to reduce CDS spreads by 4 basis points. We also analyze this effect across regions, industries, business cycle stages and ESG quantiles. Additionally, we conduct a path analysis and uncover indirect ESG effects on credit risks. These findings indicate that investors may improve performance and credit risk management when considering ESG.

Keywords: Corporate social responsibility (CSR); Enviromental, Social, Governance (ESG); Credit default swaps (CDS); Credit risk

JEL Classification: G12, M14

Suggested Citation

Barth, Florian and Hübel, Benjamin and Scholz, Hendrik, ESG and Corporate Credit Spreads (April 30, 2020). 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, DE 90403
Germany

Benjamin Hübel (Contact Author)

Friedrich-Alexander-Universität Erlangen-Nürnberg ( email )

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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