earticle

영어

This study examines the implications of corporate ESG practices on credit risk and credit ratings of Korean listed firms. In particular, we investigate whether ESG performance is reflected in credit risk that is derived from stock price information and credit ratings assigned by credit rating agencies, respectively. This paper aims to advance our understanding of the relationship between ESG and credit risk and promote discussion about incorporating ESG factors into credit ratings. To measure the stock-based default risk, we calculate distance to default based on the widely used Merton (1974) bond pricing model. In the model, a firm’s equity can be viewed as a call option on the firm’s assets since at the maturity of a firm’s debt, the debt holders receive their debts, and the equity holders get the remaining amount. Our Merton distance-to-default measure is calculated using the numerical procedure of Bharath and Shumway (2008). Since the growth rate of a firm’s asset value is difficult to estimate, we use two estimates for the asset value drift rate, one using the risk-free interest rate and the other using CAPM. Regarding credit ratings, firms that issue corporate bonds in Korea are required to obtain credit ratings from at least two of the three separate official credit rating agencies (Korea Investors Service, Korea Ratings and NICE Investor Service). The lower of the two or three ratings is used as the bond credit rating. The credit rating system consists of a total of 22 rating grades ranging from AAA to D (10 investment grade ratings from AAA to BBB- and 12 non-investment grade ratings from BB+ to D). We convert the letter grades to numbers varying between 1 and 22 points, where 1 point corresponds to the highest rating, AAA. We obtain ESG ratings from the Korea Corporate Governance Service (KCGS). The KCGS’s ESG ratings include three categories: environmental, social and governance. Specifically, the environmental category includes environmental strategy and organization, environmental performance, and stakeholder relations. The social category includes employees, consumers, community, and partners and competitors. The governance category includes protections of shareholder rights, boards of directors, audit institutions and disclosure. The ESG rating isassigned in October every year, and after the final ratings are released, the ratings are adjusted in January, April, and July of the following year to reflect the latest issues if any. The KCGS ESG rating consists of seven grades: S, A+, A, B+, B, C, D, with S being the highest level. We convert the letter grades to numbers varying between 1 and 7 points, where 1 point corresponds to the highest rating, S. Our baseline panel regression model tests our hypothesis that ESG rating is negatively associated with the distance to default and positively associated with the credit rating. The dependent variables are the two distance-to-default measures and the credit rating. The independent variables are ESG ratings with a set of firm-level control variables. The firm-level control variables include size, leverage, cash flow, return on assets, stock beta, and asset volatility. We include firm and industry-year fixed effects for the regression. Using the abovementioned two measures of credit risk and ESG ratings from the KCGS, we find that corporate ESG performance is positively associated with the distance to default and a firm’s credit ratings. When we separate ESG into environmental (E), social (S), and governance (G) categories, we find that G is significantly associated with both the distance to defalutand credit ratings. On the other hand, S is significantly associated only with credit ratings. However, neither distance to default nor credit ratings are significantly associated with E, which has recently been attracting substantial attention. As such, credit rating agencies seem to incorporate ESG information when evaluating credit risk ahead of the stock market investors and considers governance ratings more importantly than the social and environmental ratings. It should be noted, however, that our results do not imply that corporate environmental performance is not an important factor when evaluating the credit risk of the companies. Given that credit rating agencies recently announced that they will considerenvironmental aspects of corporate activities when evaluating the credit risk of firms, the relationship between credit ratings and environmental performance will likely strengthen in the near future. Overall, depending on information availability and public attention toward ESG issues, there could be a time delay before environmental, social, and governance factors are fully incorporated into credit ratings. Last but not least, our findings suggest that ESG factors are increasingly important in corporate credit risk assessment and investors can improve credit risk management in corporate bond portfolios by considering ESG factors when evaluating corporate credit risk.

한국어

본 연구는 기업의 환경, 사회, 지배구조(ESG) 활동이 신용위험과 신용등급에 미치는 영향에 대한 실증분석을 수행하였다. 구체적으로, 신용위험의 대용치인 Merton(1974) 의 부도거리와 신용평가사의신용등급에 기업의 ESG 평가가 반영되고 있는지, ESG 활동이 신용위험에 미치는 영향에 대한 시장의 평가와 신용평가사의 평가 간에 차이가 있는지를 분석한다. 분석결과, 기업의 ESG 활동은 신용위험 및 신용등급과 통계적으로 유의한 관계가 있음을 발견할 수 있었다. ESG 개별항목 중 지배구조부문은 신용위험 및 신용등급에 유의한 영향을 미치는 것으로 나타났으며, 사회부문은 신용등급에만 유의하게 반영되는 것으로 나타났다. 반면, 상대적으로 최근에 관심도가 높아지고 있는 환경부문은 신용위험, 신용등급 모두에 유의한 영향을 미치지 않는 것으로 나타났다. 이와 같이 ESG 개별 항목별로는 신용위험 및 신용평가 반영에 차이가 있는 것으로 보이며, 신용평가사가 시장에 비해 선제적으로 반영하는 것으로 해석된다. 또한, 최근 일부 신용평가사가 환경부문을 신용평가에 적극적으로 반영하겠다는 의지를 표명한 바, 향후에는 환경부문의 성과가 신용등급에 반영될 것으로 기대되며 시장도 이를 점차 반영할 것으로 기대된다.