Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries

We study whether and how a country's environmental, social, and governance (ESG) performance relates to its sovereign borrowing costs in international capital markets. We hypothesize that good ESG performance plays an economic role: It signals a country's commitment to sustainability and long-term orientation and is a buffer against negative shocks, leading to lower sovereign bond yield spreads. Using a sample of 20 OECD countries over the period 1996-2012, we show that countries with good ESG performance are associated with lower default risk and lower sovereign bond yield spreads. Moreover, we show that the social and governance dimensions have a significant negative association with sovereign bond yield spreads, whereas the environmental dimension does not. (C) 2018 Elsevier B.V. All rights reserved