The interplay between ESG and Credit Ratings: evidence from the European Banking Sector

This thesis explores the relationship between ESG (Environmental, Social, and Governance) ratings and credit ratings for the largest 50 European banks by assets, with a focus on understanding the sources of divergence across various ESG rating agencies. The study begins by reviewing the methodologies of leading ESG and credit rating agencies such as MSCI, Sustainalytics, S&P Global, and CDP, highlighting differences in scope, measurement, and weighting that contribute to inconsistencies in ESG scores. The research then investigates the correlation between ESG ratings and credit ratings across firms, sectors, and industries. In general, a strong ESG performance is associated with lower credit risk, although the strength of this relationship varies across different sectors depending on the specific nature of their exposures to ESG risks. Divergence between ESG and credit ratings often complicates the assessment of a firm’s overall risk profile, creating challenges for investors and stakeholders seeking to integrate ESG considerations into their decision making processes. The study then focuses on the banking sector, where ESG factors are becoming increasingly relevant due to regulatory pressures and evolving market expectations. The final chapter presents a detailed comparison of ESG and credit ratings for the top European banks, illustrating how divergences among rating agencies can complicate risk assessments and influence investment decisions. The findings suggest that while ESG ratings provide valuable insights, significant inconsistencies between agencies undermine their utility in evaluating credit risk consistently.