OUEGHLISSI Rim

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We examine whether the extra-financial performance of countries on environmental, social and governance (ESG) factors matters for sovereign bonds markets. Using a panel regression model over a data set with 23 OECD countries from 2007 to 2012, we show that ESG ratings significantly decrease government bond spreads. © 2017 Board of Trustees of the University of Illinois.

What are the determinants of borrowing cost in international capital markets? Apart from macroeconomic fundamentals, are there any qualitative factors that might capture sovereign bond spreads? In this paper we consider to what extent Environmental, social and governance (ESG) performance can affect sovereign bond spreads. First, countries with good ESG performance tend to have less default risk and thus lower bond spreads. Moreover, the economic impact is stronger in the long-run, suggesting that ESG performance is a long-lasting phenomenon. Second, we examine the financial impact of separate ESG dimensions, and find that the environmental dimension appears to have no financial impact whereas governance weighs more than social factors. Third, we examine cross-countries differences and show that ESG performance has a more significant and stronger impact in the Eurozone than elsewhere in OECD countries. Fourth, we include evidence from the global financial crisis and find stronger influence of country sustainability performance during crisis period.

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This thesis attempts to shed light on the possible links between the commitment to sustainable development of companies and countries and performance. The first part deals with the microeconomic aspect by focusing on the link between corporate social responsibility (CSR), transposed from sustainable development to the corporate world, and firm performance. The determinants of CSR decisions play a central role in better understanding the CSR/performance link. In particular, Chapter 1 shows that the size of the company determines the level of consideration given to social and environmental issues, highlighting that SMEs, which are less concerned by CSR than large groups, invest more in issues related to their stakeholders. Chapter 2 explores how corporate governance, and in particular ownership structure, affects companies' CSR commitment. It shows that the development of CSR approaches is negatively related to the presence of majority shareholders. After highlighting firm size and ownership structure as key factors in CSR decisions and potentially important determinants of the CSR-performance relationship, Chapter 3 takes an example of CSR practices: "good workplace atmosphere" and examines its impact on the level of employee effort. The results conclude that there is a negative correlation between good work atmosphere and productive effort and no link with cognitive effort. These results provide a better understanding of the underlying processes and mechanisms that might intervene between CSR and firm performance.The second part, macroeconomic, focuses on the relationship between governments' environmental, social and governance (ESG) commitment and economic performance. More specifically, the analysis raises two questions. The first concerns the link between extra-financial performance and sovereign risk. The reflection is based on a financial logic and the notion of sustainable development and/or ESG commitment is reduced to extra-financial information, which institutional investors use to assess sovereign risk. In particular, chapter 4 measures the impact of this extra-financial rating on the performance of bond funds. It shows that macroeconomic factors are not the only determinants of the price of a sovereign bond. Financial markets also take into account the extra-financial performance of governments, in the sense that good extra-financial ratings reduce the cost of sovereign debt. Chapter 5 constructs a composite index, sensitive to the level of ESG commitment of governments, and shows that the effect of ESG factors on the performance of sovereign bonds varies according to the maturities, dimensions, regions and periods selected. The second question concerns the effect of ESG practices on economic growth. Chapter 6 examines the causal links, in the short and long run, between the ESG performance of governments and economic growth. The results show that the two are co-integrated. They suggest that while ESG performance positively affects the GDP growth rate in the short run, its impact is not positive in the long run.

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This article examines whether the extra-fi nancial performance of countries on environmental, social and governance (ESG) factors matter for sovereign bonds markets. We propose an econometric analysis of the relationship between ESG performances and government bond spreads of 23 OECD countries over the 2007-2012 period. Our results reveal that ESG ratings signi ficantly decrease government bond spreads and this fi nding is robust for a wide range of model setups. We also find that the impact of ESG ratings on the cost of sovereign borrowing is more pronounced in bonds of shorter maturities. Finally, we show that extra-fi nancial performance plays an important role in assessing risk in the financial system. In particular, the informational content of ESG ratings goes beyond the set of quantitative variables traditionally used as determinant of a country's extra-fi nancial rating such as CO2 emissions, the share of protected areas, social expenditure and health expenditure per GDP, or the quality of institutions, and off ers an additional evaluation of governments' ESG performance that matters for government bond spreads.