For those who were unable to attend, we compiled the key takeaways of the presentation given by Dr. Benjamin Hübel.
His research aims to answer if credit markets incorporate ESG practices of firms into market prices, by means of analyzing Credit Default Swaps (CDS) spreads as a measure of credit risk. In doing so, he compares Europe and the US, and explores the possible impact of ESG during the Global Financial Crisis. Furthermore, he analyzes the ESG-CDS relationship across different ESG levels and explores the possibilities of other indirect channels influencing this relationship.
Hübel opened the webinar by elaborating on the history of ESG in credit markets: “In general, what we see is an increasing role of ESG in credit markets. (…) Originally, there were some corporate scandals, corporate misbehavior, which led to more public attention to ESG topics. The public awareness of sustainability then translated into political action, which in this case resulted in enormous amounts of ESG regulations. (…) Interestingly, in the last 10 years, more than 50% of ESG regulations were passed in European countries. In comparison, China and the US together only account for less 10%. This gives you an impression of Europe’s leading role when it comes to ESG integration in politics and regulation.”
He went on to explain how key credit market participants responded to the increasing number of ESG regulation, one of them being central banks: “Quite recently, both the Bank of England and the ECB publicly stated that they want to tilt away from market neutrality in terms of their purchase programs. They aim to shift away from market neutral bond buying to more market efficiency – markets being more efficient in helping fighting climate change. (…) In general, it is very remarkable that even central banks seem to change their mandate and include climate change into their policy decisions.”
After providing some general insights into the topic, Hübel discussed two competing views in the academic literature, the over-investment view, and the risk-mitigation view, with the goal of understanding which of the two is the most dominant in the market data.
The research results point towards the risk-mitigation view as the more dominant view in the market data. “Higher ESG ratings are related to lower credit spreads, which would be consistent with the risk-mitigation view. (…) We have weaker evidence for short term over-investment, but a stronger effect for long term risk mitigation,” Hübel explained. Later in the session, he discussed the results of the other analyses. Among others, he found that the ESG mitigation effect is twice as strong for European companies than for their US counterparts.
Hübel wrapped up his presentation by summing up the study’s key takeaways: “We see a risk mitigation effect, meaning that a one standard deviation improvement in ESG reduces CDS spreads of low, medium and high ESG firms. (…) For researchers and managers, it is important to have a solid understanding of ESG regulations because many of those regulations drive many of the market movements. Investors should consider ESG as a risk management tool but also as a source of active management for credit portfolios. (…) The results highlight the importance of considering ESG risks for both value-based and conventional investors. ESG risks are conventional risks now.”
Interested in learning more about the research?
Watch a replay of the webinar here: https://vimeo.com/566912367/5f95db2f5a