Companies with stronger environmental, social and governance (ESG) practices benefit from tighter CDS (credit default swaps) spreads than those with poorer ESG procedures, according to new data from the Credit and Responsibility teams at Hermes Investment Management.
Pricing ESG risk in credit markets: reinforcing our conviction, follows on from a 2017 study conducted by the teams to develop a pricing model to capture the influence of ESG factors on credit spreads. This showed a convincing relationship between ESG characteristics and credit spreads manifesting as an ESG risk curve. This year, the teams expanded the research to include an additional 500 data points.
The research found that:
- Companies with higher QESG Scores, i.e. the strongest ESG credentials, have tighter credit spreads than those with lower QESG Scores.
- Even after controlling for credit ratings, there is still a significant correlation between CDS spreads and the ESG performance of companies.
The model generated by the research’s insights helps identify mispriced issuers based on their ESG characteristics. Investors should be wary about issuers with very low credit spreads and a very poor ESG performance.
Mitch Reznick, CFA, Co-Head of Credit, Hermes Investment Management, said: “While the industry has spent years of intellectual capital on pricing operating and financial risks – the core credit risks – we were frustrated that there was no equivalent for ESG. As a result we decided to develop in-house research to examine the relationship between ESG factors and credit spreads. The ESG credit curve that we ended up with is an early, pioneering attempt to price ESG risks.”
Dr. Michael Viehs, Associate Director – ESG Integration, Hermes Investment Management, said:“This research reinforces the necessity of integrating ESG factors into investment decision making in fixed income. Our analysis shows that credit ratings are still not fully capturing the ESG risk dimension of an issuer and therefore it helps us identify issuers whose deteriorating ESG practices could lead to underperformance. By replicating and extending our previous research, we found a stronger relationship between CDS spreads and QESG Scores which matches our qualitative assessments.”
Source: Hermes
NEWSLETTER SIGN UP
And receive exclusive articles on securities markets
🏆 The 2026 Global Markets Choice Awards are here! 🌍 Nominations are officially OPEN for the celebration of excellence in global capital markets trading & technology. Nominate below:
https://www.jotform.com/form/260086385121150
Delaware Life Insurance Company is becoming the first insurance carrier to offer an index that contains cryptocurrency, adding the BlackRock U.S. Equity Bitcoin Balanced Risk 12% Index to its fixed index annuity (FIA) portfolio.
As the digital assets industry pushes toward
Franklin Templeton is expanding its tokenized fund suite, signaling growing institutional demand for blockchain-based fund infrastructure and regulated investment products moving onchain. Read the full article below:
$50 billion in active ETF inflows helped fuel a record year for @BlackRock 's iShares business, as investors continue to lean into active strategies.
Related articles
-
The firm has reached $5bn in assets under management in artifical intelligence-driven strategies.
-
The 11% increase in assets marks a second consecutive year of double-digit growth.
-
This enables transfers amongst Schroders’ clients and unlocks use cases such as collateralisation.
-
BlackRock, BNY, DTCC, Standard Chartered are exploring integrations before the launch in September.
-
The two funds mark the debut of ETFs from an Austrian investment manager.