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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°126 ▪ 22th December 2017

 


 

READ OUR NEW RESEARCH NOTE:

“How ESG can Improve Sovereign Yield Performance Analysis”

There is a need to adjust country financial wealth by its ESG performance, as traditional GDP statistics and macro-financial indicators do not account for the whole performance of an economy. Beyond Ratings’ ESG Factor-IN has been built in order to overcome such limitations in the integration of ESG in Sovereign asset management. In this context we just published a study to analyse the ability of the Beyond Ratings ESG score to explain, for example, sovereign spreads. Please find more information in our Research Note.

Read the report

 

 


ANALYST INSIGHT

Reconciling Finance and Sustainable Development: Take the ESG Corner!

The “One Planet Summit” held on December 12 in Paris was concluded with the publication of 12 international commitments. Some of these announcements come from different governments or state institutions, such as the launch of the” green finance” network of central banks and financial market authorities (the Bank of France, the Bank of England, the central banks of Mexico, Netherlands, Germany, Singapore and China).

The heart of the summit, however, was its potential to bring the private and financial sector into account and to invest in the implementation of the Paris Agreement, in order to concretely translate the commitments made during COP 21. The mobilization of institutional investors during the summit was thus reflected by the launch of the “Climate Action 100+” coalition bringing together 225 large institutional investors representing more than 26 300 billion dollars of assets under management to coordinate their actions the top 100 listed companies that emit the most greenhouse gases.

If the financial sector seems, in part, inclined to mobilize against climate change, an effort must be made to support investors in determining a sustainable management strategy. This is particularly the purpose of the ESG rating approach, taking into account the extra-financial aspects (environmental, social, governance) of companies or states.

 

Regarding Sovereign asset class, ESG integration has been hindered by lack of associated financial materiality. There is a need to adjust country financial wealth by its ESG performance. With ESG Factor-IN, Beyond Ratings has built a statistical identification of the most relevant ESG factors with regards to GDP growth through the creation of a specific model for five country groups based on income levels.

Final indicators are a computation of a Sustainable GDP per country and sensitivity analysis of financial ratings as key financial metrics. This approach provides an ESG-adjusted GDP per capita (appreciated or depreciated GDP per capita according to ESG factors) and an ESG performance score (appreciation or depreciation of GDP per capita according to ESG factors, in percent of GDP per capita). For example, in 2015, Russia’s ESG-adjusted GDP per capita stood at USD 20,362 vs. USD 23,895 for traditional GDP per capita, a depreciation (or ESG score) of -14.8% (cf. Figure below).

The Beyond Ratings research note published with this weekly digest seeks to identify the contributions of the Beyond Ratings ESG Factor-IN model when assessing Sovereign Yield Performance. Key findings are the following:

  • We show that the ESG Factor-In model performs as well as traditional credit ratings in assessing yield performance, as ESG-adjusted GDP per capita has a slightly better explanatory power of sovereign yields than Credit Rating Agencies’ ratings;
  • We also prove that an ESG approach provides additional and powerful information in the analysis of sovereign spread, as ESG factors remain statistically significant with traditional macro-financial indicators used as control variables.

As we proved that ESG integration through Beyond Ratings ESG score can provide relevant information to risk assessment and investment strategy, investors have now at their disposal a first support allowing the implementation of a sustainable management strategy. This is a first step towards a conciliation of finance and sustainable development, indispensable for the respect of the commitments in favor of the climate.

Thomas Lorans, Economist

 

 


WEEKLY FOOD FOR THOUGHT

Sovereign Risk

“The biggest in history” said President Trump!

 

On Wednesday, December 20th, Senate Republicans passed the most extensive rewrite of the United States tax code in more than 30 years, a bill that delivers a deep, permanent tax cut for corporations and shorter-term relief for individuals. President Trump marked the occasion as usual on Twitter, calling the legislation “the biggest in history Tax Cut and Reform Bill”, though experts have said that’s not the case.

The bill cuts the corporate tax rate to 21% from 35%, enhancing the United States position versus other industrialised economies, which have an average corporate tax rate of 22.5%. It also offers temporary tax breaks for other types of businesses and for individuals — including rate cuts that will tend to favour the “richest”. Most middle-class workers will also get short-term relief, but independent analyses show the amounts aren’t large. According to Urban Brookings Tax Policy Centre, the average tax cut for the bottom 80% of earners would be about USD 675 in 2018 while the top 1% of earners would get an average cut of about USD 50,000.

Sources: Beyond Ratings, Bloomberg

 

Carbon/Climate Change

Socio-economic risks from falling fish catch

Socio-economic risks from falling fish catch

This week we would like to shed light on an often-overlooked climate issue, i.e. climate change impacts on marine catch potential. Of course, some countries may see some increase in their marine fish stocks, as in Iceland. But in most areas, the present map shows that a project loss of should be expected. Moreover, losses could be beyond 8% in regions such as South-East Asia, the Mediterranean Sea or the North American West Coast. Although risks should be moderate in a country like Canada, they can be very significant in areas where the population relies heavily on fish for its nutrition and economy. Just another reminder of the multiplicity of climate risks, in particular in emerging countries.

Sources: Beyond Ratings, One Share Ocean/Sea Around Us

 

ESG

My tailor is rich…indeed he comes from USA!

Change in Household Wealth 2016-2017, by region

Recently published study from Crédit Suisse shows that world wealth grew by 6.4% between 2016 and 2017 (Global Wealth Report) reaching a record in terms of wealth per adult: USD 56,540. Wealth increase is, however, far from being fairly distributed. Indeed, the richest 0.7% got 50% of this yearly growth whereas the 70% poorest obtained only 6% of it. In other words, the 36 million of millionaires shared USD 12.1 Trillion and the 3.4 billion of people having less than USD 10,000 got on average USD 440. For people believing in a form of trickle-down economics, this could be considered as something good, for others it is an inequality gap increase that will obliterate future growth.

Sources : Beyond Ratings, Crédit Suisse

 


MORE ON BEYOND RATINGS’ SOVEREIGN EXPERTISE

 

Sovereign & Country Risks
ESG Research
Carbon Footprints

MORE RESEARCH

Recent Beyond Ratings Research Notes:

 

Read more Analysis on our website

 

 


© Beyond Ratings 2017

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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via Shutterstock.com); Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)