How ESG reshapes corporate bond valuation: risk pricing and rating interactions

The relationship between ESG performance and equity pricing has attracted considerable scholarly attention, but comparable research examining its effect on bond pricing remains comparatively underexplored. We study the impact of issuer ESG performance on the bond pricing in the Chinese primary corporate bond market and discuss the interaction between ESG and traditional credit rating in bond pricing. Based on 12,821 corporate bonds issued by 2218 listed and non-listed companies in the exchange market from 2019 to 2023, we find that better ESG performance significantly reduces bond issuance spreads. Mechanism analysis reveals that ESG performance affects the pricing of corporate bond issuance through both the incremental information effect and the fundamental effect. In the extended study, with the abolition of mandatory bond rating requirements for issuance in 2021, we find that ESG can have a corrective effect on credit rating. We also provide preliminary evidence on the impact of incorporating ESG performance into credit rating methodologies. These findings offer practical insights for investors, firms, and policymakers aiming to integrate ESG into risk management and financing strategies.