Wharton researchers find link between ESG, Material Credit Events, and Credit Risk in JACF study

Blog August 7, 2019

 

We’re happy to share video highlights of a study by Witold J. Henisz and James McGlinch of the University of Pennsylvania’s Wharton School.  The results of a new study show a connection between ESG performance, as illustrated by Truvalue Labs’ material ESG data and credit risk.

“Our study is the first large-sample empirical study of the mechanisms that link ESG performance to credit risk.  We found that Truvalue Labs captures timely and material ESG events such as regulatory inquiries, investigations, and lawsuits, which are correlated with credit risk and the likelihood of default.” 

—Dr. Witold J. Henisz, Professor of Management, The Wharton School, University of Pennsylvania

 

Interview with Witold Henisz at Truvalue Labs’ 3rd annual ESG Investing Forum

 

The study, “ESG, Material Credit Events, and Credit Risk,” describes cases of companies with relatively weak ESG performance, as indicated 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. 

Henisz and McGlinch analyzed data for a sample of 342 companies from 13 industries, excluding financial services, over the period 2009 to 2017.

 “…We found clear evidence that higher-performing companies on ESG criteria experienced subsequent lower incidence of these material events,” the study says. “Companies with lower performance relative to their peers in their industry based on material ESG criteria, as defined by the Sustainability Accounting Standards Board, experienced a higher incidence of the material events plotted here.”

 

The authors state that Truvalue Labs is unique among ESG data providers in its ability to show relative performance within an industry and the materiality of different factors by industry.

“At this level of analysis, the ability of Truvalue Labs data to take into account relative performance within industry and the materiality of the ESG criteria was critical,” the authors write. “No other ESG data series to which we have access—including MSCI-KLD, Sustainalytics, RepRisk, or ASSET4—displayed evidence of positive bivariate correlations in our full sample of firms.”

 

Read more on our perspective of the study.