Does ESG Scoring Predict Lower Default Risks for Corporate Bonds in Developed Economies?

Abstract

The dissertation is an investigation on whether or not increased ESG (Environmental, Social and Governance) scores will be correlated with reduced default risk of corporate bonds in developed economies. As the market of sustainable finance grows fast, and regulatory attention to ESG disclosure rises sharply, the correlation between ESG performance and credit risk is one of the most important issues to investors and policymakers. The study is on the case of corporate bonds in the United States, the United Kingdom, the Eurozone and Japan between 2018 and 2025. The quantitative methodology was chosen in terms of primary data analysis. MSCI and Bloomberg provided ESG ratings on a sample of 1,250 investment grade and highyield corporate bonds. Credit spreads and credit probability of default (PD) were used to measure default risk. The data sets were analysed with Pearson correlation, Ordinary Least Squares (OLS) regression and logistic regression to determine the predictive ability of the overall ESG scores and individual E, S and G pillars. The findings indicate that there is a statistically significant negative correlation between the ESG scores and the default risk. There were reduced credit spreads and reduced risk of default in higher ESG-rated bonds and the ESG scores accounted about 14. 2% of credit risk variation (pooled R 2 = 0.142). The environmental pillar presented the greatest predictive influence especially in Eurozone and Japan. This paper concludes that ESG scoring possesses moderate and significant predictive quality of lower default risk in developed markets of corporate bonds. Such results suggest the inclusion of ESG factors in the credit risk assessment and is applicable in practice to sustainable sustainable fixed-income portfolio construction and regulation.