Downgrades can hurt performance as the wider financial sector improves on sustainability
What about changes in ratings as a driver of asset performance? We have found evidence that this is the case for other sectors, so what about financials?
Since 2016, there have been 26 MSCI ESG rating upgrades (sometimes multiple upgrades for each company), skewed towards European lenders (18 out of the 26), and only 5 downgrades.
Counter-intuitively, some banks that were upgraded experienced a slightly worse performance on their CDS spreads in 2019 and 2020 compared with those that saw their rating remain constant or downgraded. However, in 2017, 2019 and 2020, banks that had their rating downgraded had larger drops in CDS spreads compared with the control group.
It’s difficult to draw industry-wide conclusions given the small number of downgrades in recent years, but this suggests ESG downgrades are more impactful when CDS spreads for the wider industry are increasing – and when ESG standards are rising across the industry.