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Sustainability and Credit Spreads in Japan

Author

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  • Tatsuyoshi Okimoto
  • Sumiko Takaoka

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

  • Tatsuyoshi Okimoto & Sumiko Takaoka, 2023. "Sustainability and Credit Spreads in Japan," CAMA Working Papers 2023-44, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-44
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-01/44_2023_okimoto_takaoka.pdf
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    Cited by:

    1. Okimoto, Tatsuyoshi & Takaoka, Sumiko, 2024. "Credit default swaps and corporate carbon emissions in Japan," Energy Economics, Elsevier, vol. 133(C).
    2. Ikuko Shiiyama, 2025. "Expected Credit Spreads and Market Choice: Evidence from Japanese Bond Issuers," JRFM, MDPI, vol. 18(9), pages 1-19, September.
    3. Lin, Zi & Yang, Qing & Chen, Shasha, 2025. "Exploring the correlation between financial leverage and corporate bond credit spreads," Finance Research Letters, Elsevier, vol. 75(C).
    4. Sharma, Shivani & Sharma, Udayan, 2025. "What does green bond prospectus communicate about credit spread?," Finance Research Letters, Elsevier, vol. 79(C).
    5. Ruizhen Li & Kanwal Zahra & Hina Najam & Saitao Jia, 2025. "Examining the role of digitalization and ESG strategies in enhancing resilience and sustainable performance of SMEs," International Entrepreneurship and Management Journal, Springer, vol. 21(1), pages 1-23, December.
    6. Dai, Haiyan & Dong, Xueqin & Xue, Fang, 2024. "Corporate credit risk and bond yield spreads: Market reactions to the spreads," Finance Research Letters, Elsevier, vol. 67(PB).
    7. Ruan, Qingsong & Li, Chengyu & Lv, Dayong & Wei, Xiaokun, 2025. "Going Green: Effect of green bond issuance on corporate debt financing costs," The North American Journal of Economics and Finance, Elsevier, vol. 75(PA).

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    Keywords

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    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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