The Effect of Environmental, Social and Governance (ESG) on Credit Ratings: Evidence from Kosdaq Firms

This paper examines the empirical association between environmental, social and governance (ESG) and the credit ratings on Kosdaq firms. Based on the argument that ESG movement would benefit shareholders by reducing firms’ downside risk, measured using the lower partial moment and value at risk, this study hypothesized that ESG movement would affect the credit ratings. This study examined the effect of ESG movement on the credit ratings using a large sample of Korean Kosdaq firms over 5-year period (2012-2016). An ESG(Environment, Social, Governance) index published by Korean Corporate Governance Service (KCGS) was used as the measure of ESG movement. The results of this study find that the firms with ESG movement exhibit the positive on the credit ratings. These results are robust across different measures of variables and testing methodologies.