The Effect of ESG Rating on Financial Performance and Green Bond Issuance within the United States

This paper explores the relationship between Environment, Social, and Governance (ESG) ratings and their effects on performance as well as corporate green bond issuance. In 2019, the United Nations declared that there is only 11 years left to act before there is irreversible damage from climate change. Even though ESG scores have been around for decades, they have only recently become a popular investing subject. However, there is a downfall from there being no clear scoring equation like there is in the rest of finance, GAAP Accounting for example. Companies like MSCI, Refinitiv, and Bloomberg have emerged as leaders in this space to provide data and weighted scores for each of the Environmental, Social, and Governance spaces, and combining them all into one ESG score for a company. Green bonds on the other hand started in around 2007. This market has grown substantially within the past decade. Roughly $157 billion worth of bonds labeled as "green were issued in 2019. Since sustainable investing is a relatively new subject, there is a lack of literature and previous studies done on the topic. However, there have been some studies that have looked into ESG and green bonds' impact on performance and pricing. For example, Buallay (2017) looks into ESG scores and their impact on performance with a focus on the European banking sector. Buallay defines performance by using the Return on Assets (ROA), Return on Equity (ROE), and Tobin's Q (TQ). In her study, she finds that ESG is in fact related to positive performance of the banks. Other studies on the green bond market have also looked into the pricing and ownership of green bonds relative to conventional ones. Baker et al. (2018) finds that green bond ownership is very concentrated and investors are paying a premium. This means that investors are giving up returns for better social performances. This paper will analyze if ESG ratings are associated with performance for public companies within the United States and will also look into the impact that ESG rating has on corporate green bond issuance with a focus on the past decade.

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