Wharton School research using Truvalue Labs data spots link between ESG, credit events, credit risk

Jonathan Boyd
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Wharton School research using Truvalue Labs data spots link between ESG, credit events, credit risk

A study by Witold J. Henisz and James McGlinch of the University of Pennsylvania's Wharton School, published in the spring issue of Applied Corporate Finance, has suggested a connection between ESG performance and credit risk.

The findings are based on use of Truvalue Labs' ESG data of which the authors stated: "We found that Truvalue Labs' ESG scores capture timely and material events such as regulatory inquiries, investigations and lawsuits, which are correlated with credit risk and the likelihood of default."

The study - ESG, Material Credit Events, and Credit Risk - builds on a growing body of research that has extended the analysis of the materiality of ESG critiera from the perspective of equity investors and creditors. As noted in the study abstract: "Past research and analysis have demonstrated the link between better management of ESG criteria and better management of risk overall. Despite this growing consensus and consistent evidence that ESG performance is correlated with credit risk, no empirical evidence has yet linked ESG performance to cost or expense variances or revenue shortfalls that could explain these correlations."

"The authors attempt to address this lack of mechanism‐based empirical evidence by citing and then building on a number of well‐publicized cases with analysis of two major ESG issues - indigenous land claims and biodiversity - as they affect the global project finance and agriculture sectors. Broadening these single‐sector results, the authors use a novel dataset providing systematic coding of material events reported in the media across a variety of empirical settings to produce the first large‐sample empirical evidence of the mechanisms linking ESG performance to credit risk."

The data sample used for the study covered 342 companies from 13 industries, exluding financial services, over the period 2009-2017.

In conclusion, there was "clear evidence that higher-performing companies on ESG criteria experienced subsequent lower incidence of adverse material events. Companies with lower performance relative to their peers in their industry based on material ESG criteria as defined by the Sustainability Accounting Standards Board (SASB), experienced a higher incidence of adverse material events."

"At this level of analysis, the ability of Truvalue Labs' data to take into account relative performance within an industry and the materiality of the ESG criteria was critical. No other ESG data series to which we have access displayed evidence of positive bivariate correlations in our full sample of firms."

Hendrik Bartel, CEO and co-founder of Truvalue Labs, responded by stating: "We're pleased to see that ESG materiality by industry reveals credit risk and that our data provides these unique insights. The findings of this study have encouraged us to accelerate our product development efforts to meet the increased demand for timely and objective data that helps clients uncover risks and opportunities across a growing set of applications."

 

Jonathan Boyd
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Jonathan Boyd

Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope.