ESG AND CREDITWORTHINESS: EVIDENCE FROM A MERCY AND JESUIT STUDENT INVESTMENT CAPITAL FUND

Environmental, social, and governance (ESG) investing is important for student-managed investment funds, particularly at Jesuit business schools. ESG-based principles provide a deeper understanding of the core principles that such institutions are looking to instill into their students and provides students with real-world sustainable investing experience. By researching and analyzing investments with positive environmental, social, and governance (ESG) characteristics, students gain a better understanding of the global impact that many firms exhibit. As a result of recent changes in the regulatory landscape and societal understanding of how firms can implement environmental, social, and governance policies into their business model, sustainable investing has become an increasingly important concept in the financial markets. At the heart of sustainable investing is the idea that investments should not only create good returns for investors, but also benefit society in various ways. This form of investing involves a broader approach to evaluating investments and helps to create a more equitable and sustainable investment portfolio. For Jesuit business schools, teaching students about sustainable investing reinforces their learning of equality, social justice, and serving others. Student-managed funds are an important part of experiential learning, and they provide a formative experience in finance education at Jesuit business schools. This study bridges the gap between ESG factors, credit risk analysis, and student-managed investment funds (SMIFs) exercising responsible investing. In particular, this study investigates the relationship between ESG scores and creditworthiness for a sample of stocks that are held in a SMIF at a Catholic university rooted in the Jesuit and Mercy traditions. In particular, this study investigates the relationship between ESG scores and credit risk analysis for the Mercy and Jesuit Student Investment Capital Fund (MAJESTIC). The MAJESTIC Fund subscribes to principles of responsible investing. This study also contributes to the existing literature by revisiting the role of efficient markets in an ESG context. In particular, the present study augments the current literature by including an ESG-related controversies variable that underlines the impact of ESG-related news on firm credit risk. We find evidence of higher levels of unmanaged ESG risk being correlated with lower levels of firm creditworthiness. When controlling for ESG-related controversies, we find an attenuation in the economic magnitude and statistical significance for our absolute and relative measures of total ESG risk ratings. However, even after controlling for ESG-related controversies, we find that the individual Environment Risk Score remains statistically significant and its negative economic magnitude is robust. Our results hold implications for credit risk managers, the role of ESG scores in credit risk assessment, and the adoption of sustainable credit risk policies and management.