Each year, the winner of the Moskowitz Prize for scholarly research of socially responsible investing (SRI) is announced at the “SRI in the Rockies” conference. The 2010 Prize winner is “Corporate Environmental Management and Credit Risk,” by Rob Bauer and Daniel Hann. Their study found that companies with strong environmental records consistently pay lower costs for debt, while firms with weaker records face higher costs of financing and lower credit ratings.
SRI strategies have typically been focused on equity investing, but some believe that environmental, social and governance (ESG) metrics could help investors evaluate credit risk and quality. (See this Dec. 1 article from Citywire of the UK, and these 2009 comments from Ran Fuchs of MSCI.) The Bauer/Hann study appears to confirm the utility of ESG research for fixed-income investment.
Co-authors Bauer (former head of research at Dutch pension fund ABP) and Hann (a PhD candidate at Maastricht University) studied the environmental practices of 582 US firms between 1995 and 2006. Their performance data was drawn from the database of KLD, which is now part of MSCI ESG Research. Along with finding that a company’s environmental performance is associated with its cost of credit, Bauer and Hann also found that this association has grown stronger in recent years – a trend they expect to continue.