ESG Performance and the Cost of Debt. Evidence from the Corporate Bond Market

Abstract

We study the effect of ESG performance on the cost of debt in the primary corporate bond market. Using an international sample of 25,234 bonds by 2,677 ESG rated issuers, we analyse yield spreads between bonds from high- versus low-ESG rated issuers, finding lower yields (by approximately 10 bps) for high-ESG firms. Results are robust to additional tests, and they are mainly explained by the environmental and social pillars. We also find that this result is driven by more developed financial markets, likely affected by lower information frictions, and by countries where bankruptcy regulations guarantee higher protection to bondholders, making them more willing to acknowledge ESG premia. Finally, we observe lower yield spreads for bond issues occurred after the introduction of the SFDR, which highlights the importance of regulations fostering socially responsible investments. Overall, our results suggest that firms can benefit from superior ESG performance in terms of lower cost of debt on the corporate bond market.

Keywords: ESG Performance, Socially Responsible Investments, Corporate bond market, Bond yields