How ESG Affected Corporate Credit Risk and Performance

This article extends the authors’ research on how environmental, social, and governance (ESG) characteristics have affected equity investing and corporate bonds. Unlike with equities—where MSCI’s previous research shows that MSCI ESG Ratings had positive effects on stocks’ risk and return characteristics—the authors find that a corporate bondholder’s main ESG focus could be mitigating downside risk, rather than capturing upside. They also examine whether ESG added value beyond credit ratings—a significant point of interest for bondholders. In short, ESG complemented credit ratings. ESG ratings had characteristics distinct from credit ratings and delivered additional insights into risk and performance. ESG was in general more financially relevant in high-yield (HY) bonds than in investment-grade (IG) bonds and more relevant in IG bonds with longer, rather than shorter, maturities. Higher-ESG-rated issuers tended to have stronger cash flow metrics, lower levels of ex ante risk, and less-frequent severe incidents than lower-rated-ESG issuers.