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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 how institutional investors in corporate debt markets respond to ESG-related concerns. Exploiting an exogenous, methodology-driven ESG rating change, we show that ESG downgraded firms face higher loan spreads than non-downgraded peers in the secondary loan market. This increase is not explained by changes in firms’ fundamental credit risk but reflects an excess ESG premium demanded by debt investors. ESG-conscious lenders are also more likely to sell downgraded loans. Finally, the effects extend to the primary loan market, where downgraded firms face higher borrowing costs, highlighting that ESG ratings influence firms’ cost of debt beyond underlying credit fundamentals. JEL Classification: E44, G20, G23, 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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    Cited by:

    1. Yiwen Ma & Seoklin Yim & Linghao Zhang, 2026. "The cost of ESG rating disagreement: increased corporate tax avoidance in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 33(3), pages 870-901, June.

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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