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Do debt investors care about ESG ratings?

Author

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  • Fabisik, Kornelia
  • Ryf, Michael
  • Schäfer, Larissa
  • Steffen, Sascha

Abstract

We study the effect of changes in firms’ ESG ratings on the cost of debt of U.S. firms using a methodology change of an ESG rating provider. We find that loan spreads of downgraded ESG-rated firms in the secondary corporate loan market increase by about 10% compared to non-downgraded ESG-rated firms after the methodology change. The effect of ESG rating downgrades is not driven by the increase in the fundamental default risk of firms but rather by the premium charged by investors above the spread for default risk. The effect is stronger for firms that are more financially constrained, firms that are more exposed to ESG and, particularly, climate risk concerns as well as firms that are more held by climate-concerned lenders. We show that also loan spreads of private (unrated) firms in industries affected by ESG rating downgrades increase after the methodology change. JEL Classification: E44, G20, G24

Suggested Citation

  • Fabisik, Kornelia & Ryf, Michael & Schäfer, Larissa & Steffen, Sascha, 2023. "Do debt investors care about ESG ratings?," Working Paper Series 2878, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232878
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    More about this item

    Keywords

    climate finance; ESG ratings; loan spreads; private firms;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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