The Credit Risk of Sustainable Firms during the Pandemic

Abstract

This study investigates how the credit risk of more sustainability-oriented firms changes when national governments intervene in their economies to counterbalance the COVID-19 pandemic. For this reason, we examine how the credit default swap spread changes on a database of all listed firms—for which a credit default swaps (CDS) contract is available—in Europe and the United Kingdom during the whole year of 2020. We find that when national governments intervene in the local economies, the CDS spreads for these firms decrease more than for other firms. Furthermore, the CDS spread changes are more sensitive to those policies aimed at supporting household and business income during the pandemic rather than those policies related to stay-at-home measures and investments in healthcare. Our results corroborate previous theories linking firm sustainability, equity and credit risk.

Do Equity Investors Care about Environment, Social and Governance (ESG) Disclosure Performance? Evidence from India

“…Martínez-Ferrero and García-Sánchez (2017) document that voluntary sustainability disclosures decrease the company's cost of capital and increase the credibility of social responsibility for the company. Similarly, Cardillo and Chiappini (2022) found that sustainable firms absorb policy measures in a better way in comparison to their counterparts as it lessens the credit risks. Cornell (2021) emphasized that companies with high ESG ratings lower the cost of capital, decreasing the investors' expected returns.…”