The Financial Materiality of Sustainability Risk in Credit Markets: A Decade of Evidence
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Understanding whether sustainability risk can materially affect risk-adjusted returns — beyond what can be explained by traditional financial metrics — is critical for credit investors to account for all the relevant risk and return drivers in their investment process. We evaluate a decade of data (from January 2015 to December 2024) to assess whether bond issuers’ sustainability characteristics offered additional explanatory power for credit risk and performance — especially after controlling for traditional factors such as duration, credit quality and liquidity.
The chart shows the average residual option-adjusted spread (OAS) for the lowest- and highest-ESG-rating terciles relative to their respective analysis universe, from January 2015 to December 2024 (monthly data). The residual OAS is calculated from cross-sectional regression of the bond’s OAS on bond-level credit quality, duration and liquidity. *** indicates significance at the 99% level. Source: MSCI ESG Research
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