The Effect of Environmental, Social and Governance (ESG) on Credit Ratings: A Comparative Study of Kospi and Kosdaq Firms

[Purpose]This paper investigates the relationship between environmental, social and governance (ESG) and the credit ratings in a comparative study using Kospi and Kosdaq firms. [Methodology]Based on the argument that ESG practices would benefit shareholders by reducing firms’ risk, measured using the lower partial moment and value at risk, this study hypothesized that ESG practices would affect the credit ratings. This study examined the effect of ESG practices on the credit ratings using a large sample of Korean Kospi and Kosdaq firms over 10－year period (2012－2021). An ESG(Environment, Social, Governance) index published by Korean Corporate Governance Service (KCGS) was used as the measure of ESG information. [Findings]The results of this study found that the firms with ESG practices show the positive on the credit ratings. The coefficient of ESG with Kospi firms was positive and significant at the one percent level and higher than those with Kosdaq firms. [Implications]This presents that the effect of ESG on credir rankings in Kospi firms is larger than those in Kosdaq firms. The results of this paper were robust across different measures of variables and testing methodologies.