PT  - JOURNAL ARTICLE
AU  - Rohit Mendiratta
AU  - Hitendra D. Varsani
AU  - Guido Giese
TI  - How ESG Affected Corporate Credit Risk and Performance
AID  - 10.3905/jesg.2021.1.031
DP  - 2021 Oct 22
TA  - The Journal of Impact and ESG Investing
PG  - jesg.2021.1.031
4099  - https://pm-research.com/content/early/2021/10/22/jesg.2021.1.031.short
4100  - https://pm-research.com/content/early/2021/10/22/jesg.2021.1.031.full
AB  - 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.Key Findings▪ This article explores the impact of incorporating ESG factors on the risk and performance of corporate-bond portfolios.▪ The authors found ESG ratings had characteristics distinct from credit ratings and delivered additional insights into risk and performance: Higher-ESG-rated issuers tended to have stronger cash flow metrics, lower levels of ex ante risk, and less-frequent severe incidents than lower-ESG-rated issuers.▪ The aggregate MSCI ESG Ratings score showed stronger results in terms of reducing risk than the individual E-, S-, and G-pillar scores. Within the three pillars, the S pillar showed the strongest performance in returns, while the E pillar showed the strongest differentiation in terms of risk over the broader universe.