Do markets value ESG risks in sovereign credit curves?

Hübel B (2022)


Publication Type: Journal article

Publication year: 2022

Journal

Book Volume: 85

Pages Range: 134-148

URI: https://www.sciencedirect.com/science/article/abs/pii/S1062976920301599

DOI: 10.1016/j.qref.2020.11.003

Abstract

This paper investigates the role of countries' environmental, social and governance (ESG) performance in sovereign CDS markets. Based on data for 60 countries from 2007 to 2017, we find that countries with superior ESG performance show (i) lower credit default swap (CDS) spreads and (ii) flatter CDS implied credit curves. This implies a risk mitigation effect of ESG which is even more pronounced in the long term than in the short term. These results remain robust with regard to various economic and financial control variables as well as credit ratings, implying that CDS markets incorporate ESG information differently than credit rating agencies. From an investor's perspective, we find that considering ESG does not involve sacrificing returns. Indeed, investors can potentially benefit from ESG differences between countries with similar credit ratings.

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How to cite

APA:

Hübel, B. (2022). Do markets value ESG risks in sovereign credit curves? Quarterly Review of Economics and Finance, 85, 134-148. https://dx.doi.org/10.1016/j.qref.2020.11.003

MLA:

Hübel, Benjamin. "Do markets value ESG risks in sovereign credit curves?" Quarterly Review of Economics and Finance 85 (2022): 134-148.

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