The social and environmental drivers of corporate credit ratings: international evidence

Gregor Dorfleitner,Johannes Grebler

doi:10.1007/s40685-020-00127-9

Abstract

We provide evidence of the exogenous impact of environmental and social performance components on credit ratings in North America, Europe, and Asia. In particular, the product innovation dimension is clearly identified as being the dominating driver of credit ratings within the environmental performance in every subsample region. In the social performance dimension, the extent of diversity is a main driver for firms in North America and Europe, but due to cultural reasons, not in Asia. Our results show that the risk mitigation view holds for all significant corporate social or environmental performance variables, but the magnitude of impact differs regionally.

Highlights

We identify the single dimensions of corporate social and environmental performance which have an impact on credit ratings
We provide evidence of the exogenous impact of environmental and social performance components on credit ratings in North America, Europe, and Asia
When comparing our results with those of earlier studies on credit risk, we find accordance with Jiraporn et al (2014) in the sense that overall corporate social performance (CSP) has a positive impact on credit ratings in North America

Summary

Introduction

We identify the single dimensions of corporate social and environmental performance which have an impact on credit ratings. Our analysis differs from earlier studies through the joint use of more sophisticated and transparent corporate social performance (CSP) measures of Asset, the identification of the affecting CSP components, the regional differentiation in an international dataset (North America, Europe, and Asia), and the use of an instrumental variables approach in. An international analysis with an adequate credit risk model and a sufficient approach to identify relevant CSP aspects which have a causal impact on credit ratings is still lacking in the literature. We fill this gap by applying the analysis to both CSP in general and its components in an international dataset including Asset CSP measures based on the two-stage predictor substitution (2SPS) with an established credit risk model in the second stage.

Theoretical considerations

Methodology

Empirical tests

The impact of CSP and its components

The region matters

Robustness checks

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Findings

Conclusion