ESG and Firms' Creditworthiness: An Empirical Analysis.

Abstract

Individual and institutional investors have considerably increased their interest in environmental, social and governance (ESG). In the last decade, the amount of assets under management in socially responsible investment products has grown. Given the ever-growing importance that Millennial and Z generations have posed and are posing on the theme, this trend is intended to accelerate. Nevertheless, a clear understanding of the economic benefits of investing in ESG product is still missing. Several types of research have documented copious positive economic effects related to ESG: lower cost of capital, cost reduction, productivity uplift and profitability are just a few examples. Being factors influencing corporate creditworthiness, these ones could considerably impact companies credit risk indicators. The aim of this thesis is to identify empirical evidence of a relationship between ESG parameters and credit default swap spread with reference to corporate fixed income. In the first chapter, a general overview of ESG world and its principal aspects will be discussed. Different distinctions of sustainability investments will be analysed, by concentrating on the aim they pursuit. Subsequently, an analysis of the work undertaken by SRI and UN PRI will be taken into consideration. At the end of the chapter, the attention will be focused on the reasons why investors should use ESG in their investment decision-making and the myths around the process of environmental, sustainable and governance factors integration. The second chapter will focus on the relation between ESG and creditworthiness. Initially, it will be centred around the concept of corporate social responsibility and the influencing factors of corporate creditworthiness. Instead, in the second part, a more detailed analysis of ESG and creditworthiness factors will be put under the lens. Lastly, an examination of different models, such as Merton model and Fama & MacBeth regression model together with the economic transmission channel, will be viewed. The last chapter will be composed of an ordered regression model between ESG parameters and corporate default swap (CDS) spreads. The use of CDS swap is justified by the fact that it represents a good market proxy for credit risk. Therefore, the aim is to understand whether exists a relationship with parameters or just with some of them.