Achievements and Challenges in ESG Markets
BIS Quarterly Review, December 2021
15 Pages Posted: 3 Mar 2022
Date Written: December 20, 2021
Abstract
Financial markets can support the transition to a more sustainable and fairer economy by influencing firms’ funding costs. To explore this mechanism, we study the extent to which investors respond to signals about the environmental or social benefits stemming from given projects or firms. We find evidence of a carbon risk premium: debt from entities with a higher carbon footprint trades at marginally higher yields, all else the same. We also document that investors are willing to pay a social premium – which we refer to as 'socium' – when a firm issues a social rather than a conventional bond. The magnitudes of the carbon risk premium and socium are modest but non-negligible in some industrial sectors and market segments. Some obstacles – such as “ESG washing” – stand in the way of further ESG market deepening, limiting contributions to sustainable development.
Keywords: ESG, carbon emissions, social bonds
JEL Classification: Q01, Q5
Suggested Citation: Suggested Citation