Finance and Accounting Research Seminar - Larissa Shcaefer (Frankfurt School of Finance) "Do Debt Investors Care about ESG Ratings?"

We study whether institutional investors in corporate debt markets respond to

environmental, social, and corporate governance (ESG)-related concerns. We

exploit exogenous, methodology-driven ESG rating revisions and study their

effect on the cost of debt of U.S. firms in the secondary corporate loan market.

We find that firms experiencing ESG downgrades face significantly higher loan

spreads relative to non-downgraded firms following the methodology change.

This increase is not driven by a deterioration in firms’ fundamental default

risk, but rather by a premium charged by debt investors beyond the premium

for default risk. Debt investors are also more likely to sell downgraded firms

during the same period, with the effect being stronger among more ESG-

conscious investors. Finally, we show that this has implications for the cost

of debt of firms in the primary corporate loan market.