ESG Ratings and Performance of Corporate Bonds

Abstract

The authors study the historical relationship between environmental, social, and governance (ESG) ratings and corporate bond spread and performance, finding that corporate bonds with high composite ESG ratings have slightly lower spreads, all else being equal. They also find that bonds with high ESG ratings have modestly outperformed their lowerrated peers when controlling for various risk exposures. They provide details on the effects of individual E, S, and G scores on performance. The outperformance of low-ESG issuers by their high-ESG peers through the past eight years has not been accompanied by increasing relative valuation. This suggests that the ESG performance gain is not a consequence of buying pressure and therefore might be retained.