Environmental, Social, and Governance (ESG) Outcomes and Municipal Credit Risk

Business & Society, 0(0), 2024 https://doi.org/10.1177/00076503231220541

103 Pages Posted: 24 Mar 2022 Last revised: 1 Feb 2024

See all articles by Christopher Bruno

Christopher Bruno

The Wharton School, Management Department

Witold J. Henisz

University of Pennsylvania - Management Department

Date Written: January 27, 2024

Abstract

We investigate the association between a wide range of community level environmental, social, and governance (ESG) outcomes and the credit risk of US municipal finance fixed income securities. We develop a novel dataset of multiple ESG outcomes for US counties and connect it to a 2001-2020 panel of municipal bonds issued within those counties. Overall, we find supportive evidence that collective increases in community level ESG factors (i.e., ESG outcomes) are associated with reductions in credit risk for US municipal finance instruments over time. We theorize that these associations arise from variations in investor perceptions and manifested changes in fiscal health over time as a function of changing ESG outcomes. Post-hoc analyses leveraging quasi-exogenous shocks to uncertainty, as well as connecting ESG outcomes to various measures of fiscal health at the county-year level, and credit ratings at the bond-year level, help validate this theory. Our research suggests that even socially agnostic investors should investigate the environmental and social performance of a municipality as part of their credit due diligence.

Keywords: ESG, Environmental Social Governance, municipal bonds, municipalities, inequality, credit risk

JEL Classification: G12, H40, H71, H72, H74

Suggested Citation

Bruno, Christopher and Henisz, Witold Jerzy, Environmental, Social, and Governance (ESG) Outcomes and Municipal Credit Risk (January 27, 2024). Business & Society, 0(0), 2024 https://doi.org/10.1177/00076503231220541, Available at SSRN: https://ssrn.com/abstract=4035995 or http://dx.doi.org/10.2139/ssrn.4035995

Christopher Bruno (Contact Author)

The Wharton School, Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Witold Jerzy Henisz

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
215-898-0788 (Phone)
215-898-0401 (Fax)

HOME PAGE: http://www-management.wharton.upenn.edu/henisz/

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