Extra-Financial Risk Factors and the Cost of Debt.

Summary This thesis aims to analyze whether environmental, social and governance (ESG) performance is integrated by corporate and sovereign debt markets. The first chapter focuses on ESG information published with negative content and its negative impact on the cost of debt. Specifically, in the industrial and utility sectors, negative social and governance events increase the cost of debt. Also, a good general level of ESG performance acts as an insurance mechanism against these negative events. In a second chapter, the results of a portfolio simulation integrating corporate ESG performance will be presented. A portfolio manager can improve the aggregate level of ESG performance of the portfolio by 1.5 standard deviations without decreasing the financial performance. Thus, the manager can combine this integration with financial asset allocation strategies or absolute return strategies. In a third chapter, I analyze the results on the reduction of the cost of debt due to a good environmental and social performance of emerging sovereigns. Finally, in the fourth chapter I describe how the governance performance of sovereigns influences the difference between the yield issued in foreign currency and that issued in local currency. In developed countries this difference increases with political risk, i.e. foreign yield increases faster than domestic yield. In emerging countries, the opposite effect is observed. This difference between the two yields varies more strongly with an increasing proportion of domestic debt held by foreign investors.