ESG as a Measure of Credit Ratings

Patrycja Chodnicka-Jaworska

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Credit Risk and Financial Regulations Corporate Social Responsibility Reporting Sustainable Finance and Green Bonds

Abstract

The aim of this study was to examine the impact of environmental, social, and governance (ESG) measures on credit ratings given to non-financial institutions by the largest credit rating agencies according to economic sector divisions. The hypotheses were as follows: a strong negative impact on non-financial institutions’ credit rating changes will result from ESG risk changes, and the reaction of credit rating changes will vary in different sectors. Panel event models were used to verify these hypotheses. The study used data from the Thomson Reuters Database for the period 2010–2020. The analysis was based on the literature on credit rating determinants and on papers and reports on COVID-19, ESG factors, and their impact on credit rating changes. Linear decomposition was used for the analysis. To verify these hypotheses, long-term issuer credit ratings presented by Moody’s and Fitch for European companies listed on these stock exchanges have been used. In the analyses, financial and non-financial factors were also considered. The results suggested that, within the last year, the methodology presented by credit rating agencies has changed, and ESG factors are one of the basic measures that are used to verify credit rating changes, especially those related to the pandemic.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1977Determinants of corporate borrowing 2003Corporate Social and Financial Performance: A Meta-Analysis 2015ESG and financial performance: aggregated evidence from more than 2000 empirical studies 1999The determinants and implications of corporate cash holdings 2017Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis 2008The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis 2004Information and the Cost of Capital

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