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Measuring the effect of government ESG performance on sovereign borrowing cost

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  • Patricia Crifo

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne, EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Marc-Arthur Diaye

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)

  • Rim Oueghlissi

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)

Abstract

This article examines whether the extra-fi nancial performance of countries on environmental, social and governance (ESG) factors matter for sovereign bonds markets. We propose an econometric analysis of the relationship between ESG performances and government bond spreads of 23 OECD countries over the 2007-2012 period. Our results reveal that ESG ratings signi ficantly decrease government bond spreads and this fi nding is robust for a wide range of model setups. We also find that the impact of ESG ratings on the cost of sovereign borrowing is more pronounced in bonds of shorter maturities. Finally, we show that extra-fi nancial performance plays an important role in assessing risk in the financial system. In particular, the informational content of ESG ratings goes beyond the set of quantitative variables traditionally used as determinant of a country's extra-fi nancial rating such as CO2 emissions, the share of protected areas, social expenditure and health expenditure per GDP, or the quality of institutions, and off ers an additional evaluation of governments' ESG performance that matters for government bond spreads.

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  • Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2015. "Measuring the effect of government ESG performance on sovereign borrowing cost," Working Papers hal-00951304, HAL.
    • Handle: RePEc:hal:wpaper:hal-00951304
    Note: View the original document on HAL open archive server: https://hal.science/hal-00951304v3
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    2. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    3. Florian Berg & Paula Margaretic & Sébastien Pouget, 2016. "Sovereign Bond Spreads and Extra-Financial Performance: An Empirical Analysis of Emerging Markets," Working Papers Central Bank of Chile 789, Central Bank of Chile.
    4. Hamzeh Al Amosh & Saleh F. A. Khatib & Husam Ananzeh, 2024. "Terrorist attacks and environmental social and governance performance: Evidence from cross‐country panel data," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 210-223, January.
    5. Raphael Semet & Thierry Roncalli & Lauren Stagnol, 2021. "ESG and Sovereign Risk: What is Priced in by the Bond Market and Credit Rating Agencies?," Papers 2110.06617, arXiv.org.
    6. Magdalena Ziolo & Beata Zofia Filipiak & Iwona Bąk & Katarzyna Cheba & Diana Mihaela Tîrca & Isabel Novo-Corti, 2019. "Finance, Sustainability and Negative Externalities. An Overview of the European Context," Sustainability, MDPI, vol. 11(15), pages 1-35, August.
    7. Céline Louche & Timo Busch & Patricia Crifo & Alfred Marcus, 2019. "Financial Markets and the Transition to a Low-Carbon Economy: Challenging the Dominant Logics," Post-Print hal-02016756, HAL.

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