ESG and corporate credit spreads

Abstract

PurposeThe authors investigate the implications of environmental, social and governance (ESG) practices of firms for the pricing of their credit default swaps (CDS). In doing so, the authors compare European and US firms and consider nonlinear and indirect effects. This complements the previous literature focusing on linear and direct effects using bond yields and credit ratings of US firms.Design/methodology/approachFor this purpose, the authors apply fixed effects regressions on a comprehensive panel data set of US and European firms. Further, nonlinear and indirect effects are investigated utilizing quantile regressions and a path analysis.FindingsThe evidence indicates that higher ESG ratings mitigate credit risks of US and European firms from 2007 to 2019. The risk mitigation effect is U-shaped across ESG quantiles, which is consistent with opposing effects of growing stakeholder influence capacity and diminishing marginal returns on ESG investments. The authors further reveal a mediating indirect volatility channel that substantially amplifies the direct effect of ESG on credit risk. A one-standard-deviation improvement in ESG ratings is estimated to reduce CDS spreads of low, medium and high ESG firms by approximately 4%, 8% and 3%, respectively.Originality/valueThis is the first study to examine whether credit markets reflect regional differences between Europe and the US with regard to the ESG-CDS-relationship. In addition, this paper contributes to the existing literature by investigating differences in the response of CDS spreads across ESG quantiles and to study potential indirect channels connecting ESG and CDS spreads using structural credit risk variables.

Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks Affects the CDS Term Structure

“…33 Specifically, we filter out negative CDS spreads and observations with values of 0 for all maturities except for the five-year maturity. Following Barth et al (2019), we also drop CDS observations with spreads above 2,000 basis points on any maturity below seven years. More details on the collection process can be found in Section 1 of the Internet Appendix.…”

A Study on the Level of Awareness and Perception of Investors Regarding Socially Responsible Investing in Sikkim

“…Different scholars have also studied the behaviour of investors with respect to responsible investing in the Indian context (Barth, Hübel, & Scholz, 2020;Nair & Ladha, 2013). Studies have also focused on the sustainability practices in India (Bodhanwala & Bodhanwala, 2018;Gautam & Singh, 2010).…”

“…(Park & Kowal, 2013) studied the theoretical & practical awareness and knowledge with respect to Socially Responsible Investing (SRI) in emerging countries. Different scholars have also studied the behaviour of investors with respect to responsible investing in the Indian context (Barth, Hübel, & Scholz, 2020;Nair & Ladha, 2013). Studies have also focused on the sustainability practices in India (Bodhanwala & Bodhanwala, 2018;Gautam & Singh, 2010).…”

Sustainable finance: A journey toward ESG and climate risk

“…Furthermore, the sustainability effect was strong for companies with low leverage and high market capitalization, while it was not profitable for small or indebted companies (even though no presence of a penalty was observed). Barth et al (2019) In later work, Barth et al (2022) expanded their analysis to the United States, covering 470 companies for the period from 2007 to 2019. IThey used data from MSCI and Refinitiv EIKON (ESG data) and Markit (CDS data) and performed linear panel regressions and quantile regressions to assess the relationship between CDS spreads and ESG.…”