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ESG in credit ratings and the impact on financial markets

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  • Florian Kiesel
  • Felix Lücke

Abstract

This study examines environment, social, governance (ESG) consideration in rating reports published by credit rating agencies. 3,719 Moody's credit rating reports between 2004 and 2015 are examined and the ESG consideration is analyzed using a latent dirichlet allocation (LDA) approach. We further analyze the stock returns and credit default swap (CDS) spread changes to check whether ESG consideration has an effect on the capital market reactions. We find a small but present consideration of ESG in rating decisions. Within ESG, corporate governance plays the most important role. Moreover, the results reveal that ESG consideration is a significant determinant in the stock return and CDS spread around the rating announcement. We find that all ESG criteria are important for equity and debt investors.

Suggested Citation

  • Florian Kiesel & Felix Lücke, 2019. "ESG in credit ratings and the impact on financial markets," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 28(3), pages 263-290, August.
    • Handle: RePEc:wly:finmar:v:28:y:2019:i:3:p:263-290
    DOI: 10.1111/fmii.12114
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    Cited by:

    1. Fabrizio Ferriani & Marcello Pericoli, 2024. "ESG risks and corporate viability: insights from default probability term structure analysis," Questioni di Economia e Finanza (Occasional Papers) 892, Bank of Italy, Economic Research and International Relations Area.
    2. Afef Bouattour & Maha Kalai & Kamel Helali, 2024. "The non-linear relationship between ESG performance and bank stability in the digital era: new evidence from a regime-switching approach," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.

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