ESG and Firm's Default Risk

Li, Hao; Zhang, Xuan; Zhao, Yang

doi:10.1016/j.frl.2022.102713

Cited by 77 publications

(31 citation statements)

References 17 publications

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“…This is of practical importance to investors, as the integration of ESG factors into investment decisionmaking also comes with the added benefit of lower credit risk. This finding is consistent with much of the literature within the ESG-credit risk nexus (Apergis et al, 2022;Erragragui, 2018;Stellner et al, 2015;Li et al, 2022), adding further weight to the UN PRI initiative to incorporate ESG factors into credit ratings (Kiesel and L€ ucke, 2019). Regulators should work with relevant stakeholders such as the UNPRI to enhance standardization, consistency and transparency of ESG information provided by credit rating agencies or others.…”

Section: Discussionsupporting

confidence: 81%

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Environment, social and governance (ESG) performance and CDS spreads: the role of country sustainability

Razak

Ibrahim

2023

JRF

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Purpose Based on a sample of 1,872 firm-year observations for 573 global firms over the period 2013–2016, this study aims to provide empirical evidence on how environmental, social and governance (ESG) performance affects corporate creditworthiness as measured by credit default swap (CDS) spreads.Design/methodology/approach The authors use a regression model that accounts for country, industry and time-fixed effects as well as the instrumental-based Generalized Method of Moments (GMM) approach to dynamic panel modeling.Findings This study finds that improvements in ESG performance, especially in its governance pillar, reduce credit risk. Further, the authors uncover evidence suggesting the complementarity between ESG performance and country-level sustainability. The results indicate a stronger risk-mitigating impact of ESG performance in countries with higher sustainability scores.Practical implications In terms of practical implications, the findings suggest that corporations should strengthen governance frameworks and procedures to reduce credit risk, prior to embarking on environmental and social objectives. Further, the finding that country sustainability is an important determinant of CDS spreads suggests that country-level sustainability initiatives would not only help to preserve natural capital and promote social capital but also be beneficial to businesses and financial stability.Originality/value The study adds to the literature on the effects of ESG performance on credit risk by (1) utilizing a measure of ESG performance that considers the financial materiality of ESG issues across different industries; (2) utilizing a market-based measure of credit risk and CDS spreads; (3) examining the relative importance of ESG components to credit risk, rather than just the aggregate measure; and (4) assessing the influence of country sustainability on the relationship between ESG and credit risk.

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Section: Discussionsupporting

confidence: 81%

“…, 2022; Erragragui, 2018; Stellner et al. , 2015; Li et al. , 2022), adding further weight to the UN PRI initiative to incorporate ESG factors into credit ratings (Kiesel and Lücke, 2019).…”

Section: Discussionmentioning

confidence: 99%

Environment, social and governance (ESG) performance and CDS spreads: the role of country sustainability

Razak

Ibrahim

2023

JRF

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“…Second, firms with a high-quality ESG performance are more effective in mitigating financial constraints and increasing TFP. Firms with a good performance of ESG have a lower default risk, lower financing costs, and higher cash holdings of enterprises (Li et al, 2022). For corporate managers, ESG is a good tool that reduces the cost of raising capital in the capital markets (Luo, 2022), which in turn enhance the firm's TFP.…”

Section: Literature Review and Hypotheses Development Esg Performance...mentioning

confidence: 99%

“…The present study offers three major contributions to the research on ESG, which are given as follows: first, our research discusses the impact of ESG on TFP, enriching the existing literature on the influence of ESG. The existing literature focuses on the impact of ESG on the firm value (Azmi et al, 2021;Wong et al, 2021;Bofinger et al, 2022), idiosyncratic risk (He et al, 2022), financial risk (Shakil, 2021), cash flow (Gregory, 2022), default risk (Li et al, 2022), and costs of raising capital (Luo, 2022). However, the impact of ESG on TFP has not been given due attention.…”

Section: Introductionmentioning

confidence: 99%

Does ESG performance promote total factor productivity? Evidence from China

Gao

Sun³

2022

Front. Ecol. Evol.

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Currently, environmental, social, and corporate governance (ESG) has become an all-pervasive term in the industrial sector, owing to its significant impact on corporate decision-making. While most of the studies provide evidence that the ESG significantly improves a firm's performance and value in the long run, few studies quantitatively analyzed the linkage between ESG and total factor productivity (TFP). Using the data of Chinese-listed companies during 2010–2020, we found that there is a positive relationship between ESG performance and TFP. ESG also improves the corporate TFP by reducing the financial constraints and improving the innovation input. Our extended analysis revealed that this beneficial effect tends to be stronger for SOEs (state-owned enterprises) and industries with high pollution levels. This study also brought to light some implications for Chinese firms in relation to their ESG practices and sustainable development.

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“…Sustainability and credit risk represent two mainstream fields of study. However, the relationship between sustainability and credit risk is under-investigated (Bannier et al, 2022; Li et al, 2022) and results are contradictory (Gao et al, 2021). For example, studies on the relationship between firm sustainability and credit rating provide mixed findings (Attig et al, 2013; Cheung et al, 2018; Goss & Roberts, 2011; Stellner et al, 2015; Weber et al, 2010; Ye & Zhang, 2011).…”

Section: Introductionmentioning

confidence: 99%

The Credit Risk of Sustainable Firms during the Pandemic

Giovanni

Chiappini

2022

Global Business Review

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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.

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ESG and Firm's Default Risk

Cited by 77 publications

References 17 publications

Environment, social and governance (ESG) performance and CDS spreads: the role of country sustainability

Environment, social and governance (ESG) performance and CDS spreads: the role of country sustainability

Does ESG performance promote total factor productivity? Evidence from China

The Credit Risk of Sustainable Firms during the Pandemic

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