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Alternative Market Briefing

Wharton School research finds a link between ESG performance and credit risk

Thursday, August 08, 2019

Laxman Pai, Opalesque Asia:

A study by Wharton researchers showed a link between ESG performance and material credit events and credit risk using real-life cases.

The study by Witold J. Henisz and James McGlinch of the University of Pennsylvania's Wharton School used data from Truvalue Labs, which uses AI to analyze ESG performance and results.

"Our study is the first large-sample empirical study of the mechanisms that link ESG performance to credit risk," says Henisz.

"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," he added.

The study, "ESG, Material Credit Events, and Credit Risk," describes cases of companies with relatively weak ESG performance, as indicated by Truvalue Labs' data at a moment in time, that subsequently experience high-profile negative ESG events leading to measurable increases in credit risk.

Such cases include Volkswagen's emissions scandal, Boeing's 737 MAX and Wells Fargo's sales practices, it said.

The study found "clear evidence that higher-performing companies on ESG criteria experienced a 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 e......................

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