ESG and credit risks: analysis on the relation between ESG rating and credit rating

Abstract

The COVID-19 pandemic made even clearer the impact that climate change-related events can have on the economy. Thus, institutions are starting to include ESG factors into their evaluation of counterparties. The present thesis aims at demonstrating the positive relation between ESG rating and credit rating as a measure of the impact that companies’ exposure to ESG risks has on their creditworthiness. Firms that are better responding to the issues related to environmental, social and governance factors, will face a lower negative impact on their cash flows, assets value, and reputation, hence, competitiveness. Regarding the literature, many authors have showed that company’s creditworthiness is increasingly not only strictly connected to its financial condition but also to non-financial measures. The dataset used is based on the data of 100 listed companies, from 2017 to 2022; the methods used are: a panel least square regression and two cross section least squares regression for the years 2019 and 2021. These two years were chosen because we wanted to investigate the impact of the EU Regulation 2020, which defined the characteristics of a sustainable company, as an exogenous policy shock. Data were taken from MOODYS and MSCI platforms for credit and ESG ratings respectively. The results of the analysis indeed confirmed a positive correlation between MSCI rating and MOODYS one and they tested to be robust also when adding various control variables.