Do debt investors care about ESG Ratings?

Kornelia Fabisik, Michael Ryf, Larissa Schäfer and Sascha Steffen

No 2878, Working Paper Series from European Central Bank

Abstract: We study how institutional investors in corporate debt markets respond to ESG-related concerns. Exploiting an exogenous, methodology-driven ESG rating change, we show that ESG downgraded firms face higher loan spreads than non-downgraded peers in the secondary loan market. This increase is not explained by changes in firms’ fundamental credit risk but reflects an excess ESG premium demanded by debt investors. ESG-conscious lenders are also more likely to sell downgraded loans. Finally, the effects extend to the primary loan market, where downgraded firms face higher borrowing costs, highlighting that ESG ratings influence firms’ cost of debt beyond underlying credit fundamentals. JEL Classification: E44, G20, G23, G24

Keywords: CLO; debt investors; ESG ratings; loan spreads (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-cfn and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232878

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