The effect of environmental sustainability on credit risk

The European Commission has proposed establishing a framework that redirects capital to sustainable investments in order to foster sustainable economic growth. A key proposal from this framework is the mandatory consideration of environmental criteria for investment decisions. However, in particular for bond investors, there is not much academic guidance on how to integrate sustainability criteria in the investment process. Hence, this study investigates the impact of environmental sustainability on the pricing of credit risk for European corporations. Furthermore, whether or not the credit worthiness of a corporation has a moderating effect on the relationship between the environmental sustainability and the credit risk premium is analyzed. The findings prove that more sustainable companies have lower credit risk premiums if they also have a high credit worthiness.