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Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries

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  • Capelle-Blancard, Gunther
  • Crifo, Patricia
  • Diaye, Marc-Arthur
  • Oueghlissi, Rim
  • Scholtens, Bert

Abstract

We study whether and how a country's environmental, social, and governance (ESG) performance relates to its sovereign borrowing costs in international capital markets. We hypothesize that good ESG performance plays an economic role: It signals a country's commitment to sustainability and long-term orientation and is a buffer against negative shocks, leading to lower sovereign bond yield spreads. Using a sample of 20 OECD countries over the period 1996–2012, we show that countries with good ESG performance are associated with lower default risk and lower sovereign bond yield spreads. Moreover, we show that the social and governance dimensions have a significant negative association with sovereign bond yield spreads, whereas the environmental dimension does not.

Suggested Citation

  • Capelle-Blancard, Gunther & Crifo, Patricia & Diaye, Marc-Arthur & Oueghlissi, Rim & Scholtens, Bert, 2019. "Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 156-169.
  • Handle: RePEc:eee:jbfina:v:98:y:2019:i:c:p:156-169
    DOI: 10.1016/j.jbankfin.2018.11.011
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    Keywords

    ESG performance; Sovereign bonds; Sustainability; Yield spreads;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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