“The Impact of ESG Ratings on Default Probability” An Empirical Analysis on European Firms

Abstract

The objective of the dissertation is to assess the impact of ESG Ratings on the default probability of European firms. In particular, the panel data analysis takes into consideration the relation between the CDS spreads of a sample of 181 European firms belonging to different sectors and the ESG Ratings assigned by one of the main international rating agencies (i.e. Refinitiv Eikon) to these companies. The data present in the database are extracted from three different sources of information: Bloomberg, Thomson Reuters Eikon and CDP. The research is based on the ratings assigned by Refinitiv to the three ESG pillars (Environmental – Social – Governance) of a company and, more specifically, on their components (Emissions Score, Human Rights Score, Management Score etc.). Moreover, it has been studied the impact that the subscription of the “Paris Agreement on Climate Change” in 2015 had on ESG and CDS data and on the perception of investors towards ESG themes and sustainable finance. In fact, in the last decades, the increase of environmental and social concerns, caused by the continuously worsening situation of climate change and by the widespread plague of labour exploitation, has pervaded the financial and economic systems. Hence, more and more frequently, companies and countries are evaluated considering environmental, social and governance (ESG) factors rather than looking only at the financial metrics. By doing so, investors are willing to finance long term investments in sustainable economic activities and projects conducted by companies aiming to create a positive impact.