Sovereign Credit Ratings and Corporate Environmental Performance: The Moderating Role of Voice and Accountability

ABSTRACT Governments and corporations can capitalise on improvements in Sovereign Credit Ratings (SCRs) by promoting environmentally friendly policies and developing infrastructure to achieve sustainable economic growth. Alternatively, they may choose to follow a ‘race to the bottom’ approach. The pursuit of sustainable economic development hinges on the voice and accountability (VA) norms of economic agents. This study examines the environmental performance of firms in response to changes in SCRs, utilising a sample from 88 countries. The empirical findings indicate that a rating upgrade leads to deterioration of firms' environmental performance in the following year, whereas a downgrade has the opposite effect. Additionally, the study finds that VA positively moderates the negative relationship between SCRs and environmental performance. The research also reveals geographical differences in firms' responsiveness to SCRs. Specifically, firms in the Middle East and Africa are the least responsive, whereas those in South Asia and the East Asia–Pacific region are the most responsive. To effectively combat climate change, it is essential for governments and corporations to collaborate to fulfil sustainable development goals.