In 2017, Federated Hermes published research by the Credit and stewardship teams demonstrating the impact of ESG factors on credit spreads, and developed a pricing model to capture the influence of these factors on credit instruments. The research examines the relationship between a company’s Quantitative ESG (QESG) Score and credit default swaps (CDS). It showed a convincing relationship between ESG risk and credit spreads, manifesting as an ESG-risk curve.
In 2018, we expanded this research and found the relationship between ESG risk and credit spreads to be reinforced. The explanatory power of the model was strengthened with a broader time horizon.
In 2019, we conducted a study to see if there was a relationship between ESG and sovereign credit spreads. We found that countries with the lowest ESG scores have, on average, the widest CDS spreads, and countries with the highest ESG scores have the tightest spreads.
In 2020, we expanded on the 2019 study to see if the findings would hold up if we look at developed and emerging markets separately. We found that whilst the relationship between the ESG scores and credit spreads were statistically significant for both developed and emerging markets, it was stronger for developed markets.