The impact of ESG scores on sovereign credit risk

Abstract

This dissertation analyses the relationship between a country´s environmental, social and governance (ESG) performance and its sovereign bonds and Credit Default Swaps (CDS). I compare two different markets, Europe and the United States of America (US) between 1999and 2022. The results show that for European countries, superior ESG performance correlates with lower sovereign credit default swap spreads and sovereign bond yields. This implies an increase in creditworthiness for European countries. The opposite is found for the US, where good ESG performance is associated with a higher perceived risk of default, increasing bond yields and CDS spreads. Therefore, for the US market, ESG measures positively affect thecountry´s credit risk. Moreover, the social dimension is the only one with a significant association with both measures of sovereign credit risk. The environmental and governance dimensions do not show any magnitude. These empirical findings have implications for investors’ decision­making, who can benefit from these ESG differences between countries. Additionally, it provides insights for governments and policymakers when analyzing indicators that affect sovereign credit risk.

Date of Award	28 Jun 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)