Achievements and Challenges in ESG Markets

BIS Quarterly Review, December 2021

15 Pages Posted: 3 Mar 2022

See all articles by Michela Scatigna

Michela Scatigna

Bank for International Settlements (BIS)

Fan Dora Xia

Bank for International Settlements (BIS) - Monetary and Economic Department

Anna Zabai

Bank for International Settlements (BIS)

Omar Zulaica

Bank for International Settlements (BIS)

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

Scatigna, Michela and Xia, Fan Dora and Zabai, Anna and Zulaica, Omar, Achievements and Challenges in ESG Markets (December 20, 2021). BIS Quarterly Review, December 2021, Available at SSRN: https://ssrn.com/abstract=3989761 or http://dx.doi.org/10.2139/ssrn.3989761

Michela Scatigna (Contact Author)

Bank for International Settlements (BIS) ( email )

Basel, 4002
Switzerland

Fan Dora Xia

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Anna Zabai

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Omar Zulaica

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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