ESG Performance and Corporate Bond Spreads

Abstract: This paper examines the impact of ESG performance on corporate bonds spreads. The spreads are determined by the risk factors of the investment and the demand by the capital markets. It is therefore analysed whether ESG affects these determinants. The hypothesis is that increased ESG performance should lead to lower bond spreads because it has a positive effect on risk mitigation and investor demand. This is tested on 981 corporate bonds from the EMU issued during the time period 2015-2023. The empirical findings support this hypothesis showing a negative correlation between ESG performance and bond spreads. This is true for the combined ESG score and the individual pillars E, S and G. Conclusively, this study suggests that investors prefer investments with high ESG performance. From a management's perspective, the results indicate that investments in ESG will reduce the cost of debt issuing for the company.