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Sustainability and sovereign credit risk

Author

Listed:
  • Anand, Arsh
  • Vanpée, Rosanne
  • Lončarski, Igor

Abstract

The study investigates the impact of Environmental, Social, and Governance (ESG) ratings on sovereign credit risk. The study measures sovereign credit risk using a market-based, structural and an analyst-based approach, while ESG scores are obtained from three different rating agencies. The contributions of this paper are multifold. First, we discover that higher sustainability performance at the corporate level significantly decreases market-based (CDS spreads) and structural (Distance-to-default) sovereign credit risk but has no consistent impact on analyst-based (Credit ratings) sovereign credit risk measure. Second, by expanding our research to include the concept of financial materiality based on the SASB materiality map, we break down and highlight the sustainability themes that require the most attention at the sovereign level and those that can affect the credit health of countries. Third, we demonstrate that the relationship between sustainability and sovereign credit risk varies across ESG rating providers, supporting the widespread belief that sustainability metrics lack standardization and are difficult to compare across providers.

Suggested Citation

  • Anand, Arsh & Vanpée, Rosanne & Lončarski, Igor, 2023. "Sustainability and sovereign credit risk," International Review of Financial Analysis, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000108
    DOI: 10.1016/j.irfa.2023.102494
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    More about this item

    Keywords

    Sovereign credit risk; Sustainability risk; ESG ratings; Materiality;
    All these keywords.

    JEL classification:

    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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