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The Linkage between ESG Performance and Credit Ratings: A Firm-Level Perspective Analysis

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  • Alain Devalle
  • Simona Fiandrino
  • Valter Cantino

Abstract

This paper investigates the effect of environmental, social, and governance (ESG) performance on credit ratings. We argue that ESG factors should be considered in the credit analysis and the creditworthiness evaluation of borrowers because they affect borrowers’ cash flows and the likelihood of default on their debt obligations. Consequently, we develop our research by firstly reviewing the literature regarding ESG commitments within financial decision-making processes and then addressing the relation between ESG performance and the cost of debt financing. We reveal no unanimous results and no clear-cut boundaries on this matter yet. Secondly, to disentangle this relationship, which is not well defined by scholars, we empirically investigate the nexus between ESG performance and credit rating issues on a sample of 56 Italian and Spanish public firms for which ESG performance in 2015 was achieved. Our final sample includes 15 variables for 56 observations- 840 items are under analysis. Our findings suggest that ESG performance, especially concerning social and governance metrics, meaningfully affects credit ratings. We do not sort out significant results referring to environmental scores, so further research is needed to investigate this ever-growing matter and strengthen this considerable nexus.

Suggested Citation

  • Alain Devalle & Simona Fiandrino & Valter Cantino, 2017. "The Linkage between ESG Performance and Credit Ratings: A Firm-Level Perspective Analysis," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(9), pages 1-53, August.
    • Handle: RePEc:ibn:ijbmjn:v:12:y:2017:i:9:p:53
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    Cited by:

    1. Jagriti Srivastava & Aravind Sampath & Balagopal Gopalakrishnan, 2021. "Is CSR the key to unlocking debt financing during COVID-19? A multicountry perspective," Working papers 481, Indian Institute of Management Kozhikode.
    2. Gutiérrez-López, Cristina & Castro, Paula & Tascón, María T., 2022. "How can firms' transition to a low-carbon economy affect the distance to default?," Research in International Business and Finance, Elsevier, vol. 62(C).
    3. Witness Siwela & Collins C. Ngwakwe, 2024. "Effect of Corporate Environmental Performance on Banks’ Loan Pricing," International Journal of Economics and Financial Issues, Econjournals, vol. 14(3), pages 178-191, May.
    4. Dunbar, Kwamie & Treku, Daniel & Sarnie, Robert & Hoover, Jack, 2023. "What does ESG risk premia tell us about mutual fund sustainability levels: A difference-in-differences analysis," Finance Research Letters, Elsevier, vol. 57(C).
    5. Md. Mahmudul Alam & Yasmin Mohamad Tahir & Abdulazeez Y. H. Saif-Alyousfi & Wanamina Bostan Ali & Ruhaini Muda & Sabariah Nordin, 2022. "Financial factors influencing environmental, social and governance ratings of public listed companies in Bursa Malaysia," Cogent Business & Management, Taylor & Francis Journals, vol. 9(1), pages 2118207-211, December.
    6. Zied Ftiti & Maher Jeriji & Sourour Kammoun & Waël Louhichi & Amel Zenaidi, 2024. "Corporate social responsibility disclosure and corporate creditworthiness: Evidence from the UK," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1259-1276, April.
    7. Asiyenur Helhel & Eray Akgun & Yesim Helhel, 2024. "Did ESG Affect the Financial Performance of North American Fast-Moving Consumer Goods Firms in the Second Period of the Kyoto Protocol?," Sustainability, MDPI, vol. 16(22), pages 1-20, November.
    8. Hiroaki Kambe & Masatoshi Tamamura, 2022. "Effects of firm-level ESG performance on creditworthiness in Japanese listed companies," International Journal of Economic Policy Studies, Springer, vol. 16(2), pages 465-489, August.
    9. Khan, Muhammad Arif & Khan, Ashraf & Hassan, M. Kabir & Maraghini, Maria Pia, 2024. "Market response to environmental social and governance performance: A global analysis," Research in International Business and Finance, Elsevier, vol. 67(PA).
    10. Monica Billio & Michele Costola & Iva Hristova & Carmelo Latino & Loriana Pelizzon, 2021. "Inside the ESG ratings: (Dis)agreement and performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(5), pages 1426-1445, September.
    11. Matteo Mazzarano, 2024. "Financial markets implications of the energy transition: carbon content of energy use in listed companies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-20, December.
    12. Eliwa, Yasser & Aboud, Ahmed & Saleh, Ahmed, 2021. "ESG practices and the cost of debt: Evidence from EU countries," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 79(C).
    13. Arianna Agosto & Paolo Giudici & Alessandra Tanda, 2023. "How to combine ESG scores? A proposal based on credit rating prediction," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(6), pages 3222-3230, November.
    14. Ballester, Laura & González-Urteaga, Ana & Shen, Long, 2024. "Green bond issuance and credit risk: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 94(C).

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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