The Influence of ESG on Credit Risk

Table of Contents

1. Frontmatter

2. Chapter 1. Introduction

   Anna Gappmaier

   Abstract

   The increasing relevance of ESG in financial research and practice is driven by materiality, investor demand, and regulation. Since initiatives in the ESG area are associated with (high) costs for companies, the question has arisen as to whether these investments “pay off” in terms of higher performance or lower risk. Previous research has primarily focused on the shareholder value perspective. Studies on the relationship between ESG and credit risk are still scarce, especially for the European context. From a principal-agent theoretical perspective, it can be assumed that creditors assess ESG investments differently than owners. The empirical results presented here show that creditors do not (yet) reward investments in ESG.

3. Chapter 2. ESG

   Anna Gappmaier

   Abstract

   ESG as a concept is intended to make CSR measurable and to include aspects of CG in the evaluation. Accordingly, reference is made to the three-tier ESG assessment based on environmental, social, and governance criteria. ESG factors can therefore be used to examine whether a social and ecological orientation can also improve company performance or reduce risk. The definition of the governance (G) dimension in ESG is based on the continental European perspective, which is to be applied to a broader range of stakeholders. The approach pursued here is that CSR and CG complement each other and share commonalities due to their underlying topics, and are thus combined under the term ESG in this work.

4. Chapter 3. ESG and Credit Risk

   Anna Gappmaier

   Abstract

   Previous empirical studies primarily examine the effects of a company’s ESG performance from an equity perspective or a shareholder value orientation. More recent studies are increasingly focusing on the relationship between ESG and the cost of capital, or from a risk perspective. The existing evidence reveals a gap in results related to both the cost of debt and debt-related risks, namely credit risk. Derived from this need for research, the state of the art regarding ESG and credit risk is presented.

5. Chapter 4. Interim Conclusion and Hypothesis Formation

   Anna Gappmaier

   Abstract

   Previous findings predominantly relate to US samples, and for these, there is also a tendency to find evidence supporting the risk mitigation view. There are different circumstances between the US and Europe (including regulatory standards, cultural factors, and the capital market). This clearly argues in favor of specifically examining the European context. In addition, both with regard to ESG as an aggregated measure and with respect to the individual ESG dimensions, differences are evident in the results of previous research. There is (yet) no clear evidence for Europe.

6. Chapter 5. Methodology of the Empirical Study on ESG and Credit Risk

   Anna Gappmaier

   Abstract

   In this study, the dependent variables, i.e., the credit risk parameters, are estimated using ESG variables as well as emission-specific and company-specific control variables. Linear and logistic regression analyses are applied for the estimation. The sample is based on bond issuances by European companies from the years 2012–2022.

7. Chapter 6. Results of the Empirical Study on ESG and Credit Risk

   Anna Gappmaier

   Abstract

   The formulated hypotheses are tested in the European context for bond issuances. The sample includes issuances of fixed-interest, publicly placed corporate bonds denominated in euros and issued by European issuers. Based on the multivariate analyses, the null hypothesis—that ESG performance has no effect on the assessment of credit risk—cannot be rejected. Financial indicators have an impact on credit risk, while no relationship is observed with respect to a company's ESG performance indicators. If market ESG preference increases, a relationship can be observed; however, it is economically insignificant and determined by governance performance.

8. Chapter 7. Discussion of the Results

   Anna Gappmaier

   Abstract

   The findings regarding the term ESG (including CSR and CG), relevant theoretical frameworks, as well as the regulatory environment have already been discussed and critically reviewed in the corresponding chapters. The focus of this chapter is the discussion of the empirical results obtained in relation to the existing findings in the literature. In particular, the results from the multivariate regression models will be discussed.

9. Chapter 8. Conclusion

   Anna Gappmaier

   Abstract

   Based on principal-agent theory considerations, it can be assumed that creditors are more critical of ESG investments than owners. Creditors are primarily interested in maintaining the company’s ability to meet its payment obligations. The empirical results support the notion of creditors’ cautious stance towards ESG investments. Implications for both practice and research can be derived from this.

10. Backmatter