The impact of Environmental, Social, and Governance (ESG) scores’ integration on Corporate Credit Ratings: Case of CDP-Rated Firms

Abstract

This study investigates the relationship between the corporate Environmental, Social, and Governance (ESG) ratings on their credit rating in the context of listed firms subject to the Carbon Disclosure Project (CDP) scoring and assessment. Data is collected for a sample of 98 listed firms, and extracted from CDP’s A-List of 2022, which comprises firms that demonstrate leadership in climate action.  Generalized Method of Moments (GMM) analysis is deployed to test the hypotheses and determine the significance of the relationship between ESG scoring and the firm’s credit risk, using a set of control variables divided between company-specific, country-specific, and dummy variables. The empirical analysis revealed that none of the ESG metrics impacted credit ratings when performed on the overall sample. Still, results on a sectorial level showed that the governance score is only significant for consumer cyclical, while all of the 4 ESG scores were significant for the utilities sector.

Keywords: ESG, Environmental, Social, Governance, Credit Risk, Credit Rating Agency

JEL Classification: C33, G24, G56, G32

Paper type: Empirical research