Abstract

This study investigates the relationship between Environmental, Social, and Governance (ESG) ratings and credit ratings to determine whether higher ESG scores correlate with better credit ratings. Credit ratings, which measure a company's ability to meet its financial obligations, play a critical role in financial markets by guiding investment decisions and risk assessments. As ESG factors become increasingly influential in decision-making processes, understanding their impact on credit ratings provides insights into the role of sustainability in financial stability. The research employs Spearman’s rank correlation, a non-parametric inferential statistical method, to analyse data from 35 companies across various sectors, sourced from CRISIL. ESG scores, initially provided on a numerical scale, were converted into rank order using the average rank method in cases of ties, where companies with identical scores received the average of the ranks they would have otherwise occupied. Credit ratings were ranked based on their letter grades, categorizing companies into three tiers: Rank 1 for the highest, 2 for medium, and 3 for the lowest. Spearman’s rank correlation was then calculated to measure the strength and direction of the relationship between the two ranks. The analysis reveals a correlation coefficient of 0.2737, indicating a weak positive correlation between ESG and credit ratings. These findings suggest that while ESG performance may influence creditworthiness, the relationship is not strongly pronounced. The study provides valuable insights for investors, analysts, and policymakers integrating ESG factors into credit risk evaluation frameworks.

Keywords: ESG Ratings, Credit Ratings, Spearman’s Rank Correlation, Non-Parametric Analysis, CRISIL, Sustainable Finance