Do markets value ESG risks in sovereign credit curves?

This paper investigates the role of countries' environmental, social and governance (ESG) performance in sovereign CDS markets. Based on data for 60 countries from 2007 to 2017, we find that with superior ESG show (i) lower credit default swap (CDS) spreads (ii) flatter implied curves. implies a risk mitigation effect which is even more pronounced long term than short term. These results remain robust regard various economic financial control variables as well ratings, implying markets incorporate information differently rating agencies. From an investor's perspective, considering does not involve sacrificing returns. Indeed, investors can potentially benefit differences between similar ratings.