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Sustainability and credit spreads in Japan

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  • Okimoto, Tatsuyoshi
  • Takaoka, Sumiko

Abstract

Does the market value the environmental, social, and governance (ESG) performance of firms in corporate bond credit spreads? In this study, we construct the firm-level corporate bond credit spread based on the ‘bottom-up’ approach and examine the relationship between corporate ESG performance and credit spreads. Our results indicate that the ESG performance significantly decreases the credit spreads and the effects of ESG performance increase with the recognition of the importance of ESG investing regardless of the pillar. Furthermore, our analysis suggests differential trends across the issuing firms’ credit quality. Specifically, the ESG performance has a much higher impact on the credit spreads for lowly-rated firms, implying that the information on higher ESG scores could be a stronger signal for higher sustainability for those firms that are considered to have higher default risk from the financial information. Within the E, S, and G pillars, the resource use category, human rights category, and management category respectively show the most prominent annual lowering effects.

Suggested Citation

  • Okimoto, Tatsuyoshi & Takaoka, Sumiko, 2024. "Sustainability and credit spreads in Japan," International Review of Financial Analysis, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finana:v:91:y:2024:i:c:s1057521923005689
    DOI: 10.1016/j.irfa.2023.103052
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    More about this item

    Keywords

    Corporate bond spread; ESG investing; Sustainability;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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