JAMES MCGLINCH is a doctoral student at the Wharton School of the University of Pennsylvania. His research focuses on the integration of environmental, social, and governance issues into corporate strategy and the ways through which such integration impacts firm performance.
Prior to Wharton, James worked in mergers & acquisitions investment banking at Credit Suisse, global investment research at Goldman Sachs, and equity research at Barclays Capital.
Abstract: A growing body of research has extended the analysis of the materiality of ESG criteria from the perspective of equity investors to creditors. Past research and analysis have demonstrated the link between better management of ESG criteria and better management of risk overall. Despite this growing consensus and consistent evidence that ESG performance is correlated with credit risk, no empirical evidence has yet linked ESG performance to cost or expense variances or revenue shortfalls that could explain these correlations.
The authors attempt to address this lack of mechanism‐based empirical evidence by citing and then building on a number of well‐publicized cases with analysis of two major ESG issues—indigenous land claims and biodiversity—as they affect the global project finance and agriculture sectors. Broadening these single‐sector results, the authors use a novel dataset providing systematic coding of material events reported in the media across a variety of empirical settings to produce the first large‐sample empirical evidence of the mechanisms linking ESG performance to credit risk.