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Achievements and challenges in ESG markets

Author

Listed:
  • Michela Scatigna
  • Dora Xia
  • Anna Zabai
  • Omar Zulaica

Abstract

Financial markets can support the transition to a more sustainable and fairer economy by influencing firms' funding costs. To explore this mechanism, we study the extent to which investors respond to signals about the environmental or social benefits stemming from given projects or firms. We find evidence of a carbon risk premium: debt from entities with a higher carbon footprint trades at marginally higher yields, all else the same. We also document that investors are willing to pay a social premium – which we refer to as "socium" – when a firm issues a social rather than a conventional bond. The magnitudes of the carbon risk premium and socium are modest but non-negligible in some industrial sectors and market segments. Some obstacles – such as "ESG washing" – stand in the way of further ESG market deepening, limiting contributions to sustainable development

Suggested Citation

  • Michela Scatigna & Dora Xia & Anna Zabai & Omar Zulaica, 2021. "Achievements and challenges in ESG markets," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:2112f
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    References listed on IDEAS

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    8. Justin Murfin & Matthew Spiegel & Jose Scheinkman, 2020. "Is the Risk of Sea Level Rise Capitalized in Residential Real Estate?," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1217-1255.
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    Cited by:

    1. Richard Schmidt & Pinar Yesin, 2022. "The growing importance of investment funds in capital flows," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 72(01), pages 1-40, December.
    2. Van Roosebeke, Bert & Defina, Ryan, 2023. "ESG and Deposit Insurance: Taking Stock and Looking Ahead," MPRA Paper 116239, University Library of Munich, Germany.
    3. Sultan Kaheel & Khalifa Aliyu Ibrahim & Gasem Fallatah & Venkatasubramanian Lakshminarayanan & Patrick Luk & Zhenhua Luo, 2023. "Advancing Hydrogen: A Closer Look at Implementation Factors, Current Status and Future Potential," Energies, MDPI, vol. 16(24), pages 1-29, December.
    4. Daniel N. F. Plattek & Otávio H. S. Figueiredo, 2023. "Sustainable and Governance Investment Funds in Brazil: A Performance Evaluation," Sustainability, MDPI, vol. 15(11), pages 1-19, May.
    5. Magdalena Zioło & Iwona Bąk & Anna Spoz, 2023. "Theoretical framework of sustainable value creation by companies. What do we know so far?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(5), pages 2344-2361, September.
    6. Torsten Ehlers & Ulrike Elsenhuber & Anandakumar Jegarasasingam & Eric Jondeau, 2024. "Deconstructing ESG scores: investing at the category score level," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 222-244, May.
    7. Baldi, Francesco & Ferri, Giovanni, 2025. "Social bonds: Proceeds’ investment and social premium," Research in International Business and Finance, Elsevier, vol. 77(PA).
    8. Jinhui Wu & Wullianallur Raghupathi & Viju Raghupathi, 2025. "An Exploratory Study of the Association Between Green Bond Features and ESG Performance," Sustainability, MDPI, vol. 17(5), pages 1-25, February.
    9. Thilini V. Mahanama & Abootaleb Shirvani & Svetlozar Rachev, 2023. "The Financial Market of Indices of Socioeconomic Wellbeing," Papers 2303.05654, arXiv.org.
    10. Tang, Ning & Chang, Hao-Wen & Lin, Chih-Yung & Lu, Chien-Lin, 2024. "Public's evaluation of ESG and credit default swap: Evidence from East Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 87(C).
    11. Koji Takahashi & Junnosuke Shino, 2023. "Greenhouse gas emissions and bank lending," BIS Working Papers 1078, Bank for International Settlements.
    12. Faisal Alnori & Ali Shaddady, 2026. "Assessing the impact of ESG on bank stability: new evidence using linear, quantile, and CAMELS-DEA methods," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 13(1), pages 1-12, December.
    13. Porenta, Jan & Rant, Vasja, 2025. "ESG relevance in credit risk of development banks," Research in International Business and Finance, Elsevier, vol. 76(C).
    14. Thisari K. Mahanama & Abootaleb Shirvani & Svetlozar Rachev & Frank J. Fabozzi, 2023. "The Financial Market of Environmental Indices," Papers 2308.15661, arXiv.org.
    15. Huang, Kuo-Jui & Bui, Dien Giau & Hsu, Yuan-Teng & Lin, Chih-Yung, 2024. "The ESG washing in banks: Evidence from the syndicated loan market," Journal of International Money and Finance, Elsevier, vol. 142(C).
    16. Torsten Ehlers & Ulrike Elsenhuber & Kumar Jegarasasingam & Eric Jondeau, 2022. "Deconstructing ESG Scores: How to Invest with Your own Criteria," Swiss Finance Institute Research Paper Series 22-23, Swiss Finance Institute.

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    More about this item

    JEL classification:

    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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