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Pricing ESG risk in credit markets: through volatility, our conviction affirmed

To analyse credit risks with greater precision, we developed a pricing model in 2017 to capture the influence of environmental, social and governance (ESG) factors on credit spreads. It showed a convincing relationship between ESG risk and credit spreads, manifesting as an ESG-risk curve.

In 2018, we reinforced these findings. Today, we revisit our study, updating our results with a longer sample period to understand how the market volatility throughout 2020 affected the relationship between ESG factors and CDS spreads.

Key findings

  • The significant relationship between ESG factors and CDS spreads persists: companies with better ESG practices tend to have lower CDS spreads, even after controlling for credit risks.
  • The explanatory power of the model increased from both the 2017 and 2018 studies.
  • High levels of market volatility throughout 2020 did not significantly affect this relationship (a closer investigation of the relationship within 2020 is, however, warranted).

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