Research

We analyze the ESG rating criteria used by prominent agencies and show that there is a lack of a commonality in the definition of ESG (i) characteristics, (ii) attributes and (iii) standards in defining E, S and G components. We provide evidence that heterogeneity in rating criteria can lead agencies to have opposite opinions on the same evaluated companies and that agreement across those providers is substantially low. Those alternative definitions of ESG also affect sustainable investments leading to the identification of different investment universes and consequently to the creation of different benchmarks. This implies that in the asset management industry it is extremely difficult to measure the ability of a fund manager if financial performances are strongly conditioned by the chosen ESG benchmark. Finally, we find that the disagreement in the scores provided by the rating agencies disperses the effect of preferences of ESG investors on asset prices, to the point that even when there is agreement, it has no impact on financial performances. 

Environmental, social, and governance (ESG) factors have gained significant attention and are now a common practice in corporate risk assessment. Nevertheless, the absence of universally accepted standards for measuring ESG risk and impact, along with the difficulty of identifying the materiality of ESG aspects, makes assessing ESG ratings challenging. This paper aims to review the state-of-the-art literature on studies that describe and evaluate ESG rating methodologies and the impact of ESG factors on credit risk, debt and equity costs, and sovereign bonds. We also expand on the topic of ESG research by including a literature strand that focuses on the impact of climate change on financial stability. The reviewed studies suggest that positive ESG ratings are associated with an improvement in credit ratings, a reduction in credit default swap spreads, and a decrease in the costs of equity capital and debt. Finally, we consider the literature discussing the currently predominant sustainable investment (SI) strategies (negative screening and divestment) and their real limited effectiveness, but also suggesting several potential solutions for more appropriate SI strategies, a clearer standardized definition of climate change risk, a better alignment between private profit and social welfare and mostly an ESG focus on outcomes rather than on activities. With regard to the relationship between climate change and credit risk, the literature agrees on the need for adequate scoreboards and an improved disclosure process to address the problem of insufficient data availability and data quality. 

The most important determinant for the existence of a Green premium is the perceived" Green--credibility" of a bond and its issuer. We analyze a sample of more than 1,500 Green bonds with respect to their pricing on the primary and secondary market. On both markets, only certain types of bonds trade at a Green premium (ie, exhibit lower yields) relative to their conventional counterparts, namely those, which are issued by governments or supranational entities, denominated in EUR, or corporate bonds with very large issue sizes. These bonds and their issuers seem to be viewed as more credible in terms of a better implementation or a greater impact of the Green projects financed with the proceeds. For corporate issues, credibility of the Green label is of particular importance. Investors are more likely to pay a premium for a Green bond, when it is certified as such by a third party, or when it is listed on an exchange with a dedicated Green bond segment and tight listing requirements. 

This literature survey explores the potential avenues for the design of a green auto asset-backed security by focusing on the European auto securitization market. In this context, we examine the entire value chain of the securitization process to understand the incentives and interests involved at various stages of the transaction. We review recent regulatory developments, feasibility concerns, and potential designs of a sustainable securitization framework. Our study suggests that a Green Auto ABS should be based on both a green use of proceeds and a green collateral-based methodology. 

This paper investigates stock market reaction to greenwashing by analyzing a new channel whereby companies change their names to green-related ones (ie, names that evoke green and sustainable sentiments) to persuade the public that their activities are green. The findings reveal a striking positive stock price reaction to the announcement of corporate name changes to green-related names only for companies not involved in green activities at the time of the announcement. However, over an extended period of time, companies unrelated to green activities experience substantial negative abnormal returns if they fail to align their operational focus with the new name after the change. 

As ESG investing goes mainstream, investors increasingly rely on ESG ratings when making investment decisions. This study aims to delve into the overall ESG ratings provided by four prominent ESG data providers, focusing on their accounting methodologies, the relevance of the three pillars (environment, social, and governance), and the key performance indicators (KPIs) that drive these ratings. By examining a sample of European and UK companies, we question the significance of the governance and social pillars in explaining the overall ESG scores. Our findings highlight a subset of indicators that exhibit the highest correlation with ESG scores, including the presence of external audits, an environmental supply chain policy, and target emissions. This letter contributes to the ongoing ESG credibility debate and emphasizes the need for further transparency of ESG ratings.