Measuring the eff ect of government ESG performance on sovereign borrowing cost
Résumé
This article examines whether the extra- financial performance of countries on environmental, social and governance (ESG) factors matter for sovereign bonds markets. We propose an econometric analysis of the relationship between ESG performances and government bond spreads of 23 OECD countries over the 2007-2012 period. Our results reveal that ESG ratings signifi cantly decrease government bond spreads and this fi nding is robust for a wide range of model setups. We also fi nd that the impact of ESG ratings on the cost of sovereign borrowing is more pronounced in bonds of shorter maturities. Finally, we show that extra-fi nancial performance plays an important role in assessing risk in the nancial system. In particular, the informational content of ESG ratings goes beyond the set of quantitative variables traditionally used as determinant of a coun- try's extra-fi nancial rating including electricity generation, CO2 emissions, forest rents per GDP, share of protected areas, social expenditure per GDP, female to male labor force participation rate, health expenditure per GDP, R&D expenditure per GDP, hu- man development index, regulatory quality, rule of law, government eff ectiveness, political stability, voice and accountability, and corruption control.
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