Do Debt Investors Care about ESG Ratings?

Posted: 10 Mar 2022

See all articles by Kornelia Fabisik

Kornelia Fabisik

Frankfurt School of Finance & Management

Larissa Schäfer

Frankfurt School of Finance & Management

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: February 11, 2022

Abstract

A methodology change of an ESG rating provider introduces plausibly exogenous variation in firms’ ESG ratings, which allows us to study their effect on the cost of debt of U.S. firms. We find that loans spreads of downgraded ESG-rated firms in the secondary corporate loan market increase by about 10% compared to non-downgraded ESG-rated firms and compared to before the rating downgrade. ESG rating downgrades do not increase fundamental default risk of the firm but the premium charged by lenders above the spread for default risk. We find that the effect is stronger for firms that are more financially constrained and firms that are more exposed to ESG and, particularly, climate risk concerns. Importantly, we find that also loan spreads of private (unrated) firms in industries especially affected by ESG rating down- grades increased after the methodology change.

Keywords: ESG ratings, Climate finance, Loan spreads, Private firms

JEL Classification: E44, G20, G24

Suggested Citation

Fabisik, Kornelia and Schäfer, Larissa and Steffen, Sascha, Do Debt Investors Care about ESG Ratings? (February 11, 2022). Available at SSRN: https://ssrn.com/abstract=4032923

Kornelia Fabisik

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Larissa Schäfer

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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