Dissecting E, S, and G for risk mitigation: insights from the term structure of CDS

Rintu Anthony and Ranjitha Ajay

Applied Economics, 2025, vol. 57, issue 57, 9698-9712

Abstract: In this study, we utilize a comprehensive dataset of US-traded credit default swaps (CDS) to assess the impact of environmental, social, and governance (ESG) adoption on firm credit risk. Our study examines corporate bonds with key maturities from 0.5 to 30 years, covering data from 2007 to 2022. We apply fixed effects regression to analyse the impact of ESG scores on CDS spreads. The results are validated through a battery of robustness checks primarily the 2SLS method. The study finds that ESG scores, including the individual pillars, play a significant role in mitigating credit risk. The intriguing aspect of the finding is the decline in risk mitigation as the term-to-maturity increases. Further, the social pillar causes the highest sensitivity to credit risk, followed by the environmental and governance pillars. The effect of ESG adoption is slightly greater for subordinated bonds compared to senior tranches, however, the effects diverge for individual pillars. The study offers practical insights as understanding the relationship between sustainable practices and CDS term structure helps refine investment strategies and specifically pricing of credit risk.

Date: 2025
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DOI: 10.1080/00036846.2024.2423066

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