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How are ESG ratings linked to CDS spreads?

May, Emily Pauline LU (2022) EKHS35 20221
Department of Economic History
Abstract
This study examines the relationship between environmental, social and governance performance and corporate credit risk, adding to the literature which investigates ESG in the context of risk management. Using a novel proprietary ESG methodology by Danske Bank Asset Management and credit default swaps as a measure for credit risk, a combination of pooled OLS and panel fixed-effects approach is applied to a panel of 314 publicly listed firms in North America, Europe, and Asia from 2020 to 2021. Regressions are run on the aggregate dataset and on regional and sectoral subsamples, investigating whether the effect of ESG on CDS spreads differs across regions and sectors. Comparing the empirical results from the pooled OLS and fixed-effects... (More)
This study examines the relationship between environmental, social and governance performance and corporate credit risk, adding to the literature which investigates ESG in the context of risk management. Using a novel proprietary ESG methodology by Danske Bank Asset Management and credit default swaps as a measure for credit risk, a combination of pooled OLS and panel fixed-effects approach is applied to a panel of 314 publicly listed firms in North America, Europe, and Asia from 2020 to 2021. Regressions are run on the aggregate dataset and on regional and sectoral subsamples, investigating whether the effect of ESG on CDS spreads differs across regions and sectors. Comparing the empirical results from the pooled OLS and fixed-effects models, the findings from the pooled OLS cautiously point towards superior ESG performance reducing CDS spreads, particularly in North America, thereby being consistent with the risk mitigation view. The findings from the fixed-effects model are rather mixed and even point towards the overinvestment view in Europe. Furthermore, a risk-mitigating effect of ESG on CDS is found for environmentally risky sectors. Overall, additional research over a longer period would be valuable to obtain a more detailed picture of the different regions and sectors over time, respectively. (Less)
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author
May, Emily Pauline LU
supervisor
organization
course
EKHS35 20221
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Corporate Social Responsibility (CSR), Environmental, Social, Governance (ESG), Credit Default Swaps (CDS), Credit Risk
language
English
id
9090439
date added to LUP
2022-06-28 10:13:04
date last changed
2022-06-28 10:13:04
@misc{9090439,
  abstract     = {{This study examines the relationship between environmental, social and governance performance and corporate credit risk, adding to the literature which investigates ESG in the context of risk management. Using a novel proprietary ESG methodology by Danske Bank Asset Management and credit default swaps as a measure for credit risk, a combination of pooled OLS and panel fixed-effects approach is applied to a panel of 314 publicly listed firms in North America, Europe, and Asia from 2020 to 2021. Regressions are run on the aggregate dataset and on regional and sectoral subsamples, investigating whether the effect of ESG on CDS spreads differs across regions and sectors. Comparing the empirical results from the pooled OLS and fixed-effects models, the findings from the pooled OLS cautiously point towards superior ESG performance reducing CDS spreads, particularly in North America, thereby being consistent with the risk mitigation view. The findings from the fixed-effects model are rather mixed and even point towards the overinvestment view in Europe. Furthermore, a risk-mitigating effect of ESG on CDS is found for environmentally risky sectors. Overall, additional research over a longer period would be valuable to obtain a more detailed picture of the different regions and sectors over time, respectively.}},
  author       = {{May, Emily Pauline}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{How are ESG ratings linked to CDS spreads?}},
  year         = {{2022}},
}