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ESG rating confusion and bond spreads

Jin Zou, Jingzhou Yan and Guoying Deng

Economic Modelling, 2023, vol. 129, issue C

Abstract: This paper investigates the influence of ESG rating confusion on bond spreads, an area of growing importance in sustainable finance. Despite the recognition of ESG rating confusion, their effects on the bond market remain less explored. Leveraging a corporate bond pricing model, we reveal that ESG rating confusion widens the bond spread. Analyzing data from China, we find that both primary and secondary bond markets are affected, with the latter experiencing a more significant impact. Our study emphasizes the role of information asymmetry and investor preferences, outweighing the issuer’s financial position in driving these effects. Furthermore, we identify environmental and weighting inconsistencies as crucial sources of ESG rating confusion. The findings underscore the necessity of a standardized ESG rating system to enhance investor confidence and support ESG-related project financing. A cohesive rating approach among agencies correlates with narrower bond spreads, thereby fostering bond market efficiency and promoting ESG investment practices.

Keywords: ESG; Rating confusion; Bond spread; Chinese market (search for similar items in EconPapers)
JEL-codes: D83 G11 G12 M14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:129:y:2023:i:c:s026499932300367x

DOI: 10.1016/j.econmod.2023.106555

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