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This study investigates whether environmentally sensitive industries benefit from superior credit risk mitigation through sustainable practices, especially during periods of economic uncertainty. We find that there is no substantial difference in risk mitigation between sensitive and non-sensitive industries under normal economic conditions, as evidenced by U.S.-traded credit default swap (CDS). In comparison to their non-sensitive counterparts, firms in environmentally sensitive industries with stronger ESG practices experience a greater reduction in credit risk under conditions of high economic policy uncertainty (EPU). This relationship is also significant for the individual environmental and governance pillar scores. Analysis across the term structure reveals that higher ESG performance of firms in sensitive industries leads to improved risk reduction for medium- and long-term maturity bonds. However, this phenomenon is almost negligible for short-term bonds. Hence, the importance of incorporating the term structure of interest when assessing the impact of ESG practices on CDS is evident in both environmentally sensitive and non-sensitive industries.
Ajay et al. (Wed,) studied this question.