Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297318 
Year of Publication: 
2023
Series/Report no.: 
ECB Working Paper No. 2878
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We study the effect of changes in firms' ESG ratings on the cost of debt of U.S. firms using a methodology change of an ESG rating provider. We find that loan spreads of downgraded ESG-rated firms in the secondary corporate loan market increase by about 10% compared to non-downgraded ESG-rated firms after the methodology change. The effect of ESG rating downgrades is not driven by the increase in the fundamental default risk of firms but rather by the premium charged by investors above the spread for default risk. The effect is stronger for firms that are more financially constrained, firms that are more exposed to ESG and, particularly, climate risk concerns as well as firms that are more held by climate-concerned lenders. We show that also loan spreads of private (unrated) firms in industries affected by ESG rating downgrades increase after the methodology change.
Subjects: 
ESG ratings
Climate finance
Loan spreads
Private firms
JEL: 
E44
G20
G24
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6255-1
Document Type: 
Working Paper

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