Companies with a poor ESG track record are more likely to experience higher levels of volatility and wider credit spreads, according to the University of Pennsylvania.
The study by Witold Henitsz and James McGlinch published in the Journal of Applied Corporate Finance is based on a sample of 342 companies over eight years and draws a link between ESG performance, material credit events and credit risk. Examples include the VW emissions scandal and Bumadinho dam owner Vale.
Researchers found that poor ESG performance was not only associated with higher credit risk but that it had not initially been priced in by management. At the same time, researchers found evidence of companies with a poor ESG track record trading at higher credit yield spreads.
The findings could be relevant for investors holding corporate debt issued by oil and gas firms. Since 2018, such companies have approved some $50bn (£41bn) of investment in major projects that have undermined the Paris climate agreement, research by the Carbon Tracker Initiative said.