Do Credit Ratings Take into Account the Sustainability Performance of Companies?

Abstract

In the last few decades, sustainability performance measuring has become a widely-studied issue, and various measurement proposals have been put forward. However, it is also important to know whether those measures are actually being used in the real world. In this case, we take one very important indicator used by investors when they make investment decisions: the credit rating of the potential investment. We test whether credit ratings take into account the above-mentioned measures. Following the literature, we conduct a fixed-effects ordered probit analysis, using as controls the variables usually found in the related literature on credit rating analysis. The dependent variables are S&P ratings. We find that companies with higher sustainability performance tend to have higher credit ratings, though having a less consistent performance over time seems to have no effect. To check the robustness of our results, we also perform the analysis for different sectors and sub-periods. In addition, we conduct the analysis using sustainability scores provided by ASSET4 (Datastream) as an explanatory variable and using Fitch credit ratings as the explained variable.