Credit Ratings in the Age of Environmental, Social, and Governance (ESG)

Abstract

I present the first study that systematically examines the implications of ESG adoption for the credit ratings business. I find that, with a recent move by Standard & Poor’s and Moody’s towards incorporating ESG issues into their analysis, credit ratings positively reflect firms with lower carbon emissions and better social ratings. Despite this new recognition of such issues by credit rating agencies for the purpose of better understanding financial risk, I discover only limited improvement in the informational quality of credit ratings. This is concerning as firms are being rewarded and punished through policies that do not appear to contribute significantly to a better understanding of their creditworthiness.

Keywords: credit rating agency, ESG, corporate social responsibility, corporate governance

JEL Classification: G24, G34