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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°132 ▪ 08th February 2018



8 key recommendations in the HLEG final report, and some more…

The European Commission’s High-Level Group on Sustainable Finance (HLEG) just released its much-awaited Final Report. It should now lead to the release of the European Commission’s Action Plan on Sustainable Finance in March, but it is also already a useful resource providing guidance and good ideas for member countries and the financial sector.

As summarized below, the report highlights the following objectives as its priority recommendations:

  • “To introduce a common sustainable finance taxonomy to ensure market consistency and clarity, starting with climate change.
  • To clarify investor duties to extend time horizons and bring greater focus on ESG factors.
  • To upgrade Europe’s disclosure rules to make climate change risks and opportunities fully transparent.
  • To empower and connect Europe’s citizens with sustainable finance issues.
  • To develop official European sustainable finance standards, starting with one on green bonds.
  • To establish a ‘Sustainable Infrastructure Europe’ facility to expand the size and quality of the EU pipeline of sustainable assets.
  • To reform governance and leadership of companies to build sustainable finance competencies.
  • To enlarge the role and capabilities of the ESAs (European Supervisory Authorities: EBA, ESMA, EIOPA) to promote sustainable finance as part of their mandates.”

Reading between the lines, the key sustainability issues for the financial sector today thus include the questions of:

  • how we address climate change (a starting point here and a key reporting and transparency issue, in consistency with the recommendation to introduce an EU Green Bond Standard and consider an EU Green Bond label, for which climate issues would be essential),
  • how we make investment decisions consistent with the long-term (“the investment horizon of the individuals or institutions” served by investors is often long-term),
  • how we ensure comparability of risk & opportunity assessments and avoid greenwashing (the need for “a technically robust classification system to establish market clarity on what is ‘green’ or ‘sustainable’”),
  • how finance helps to mainstream sustainability issues in society (beyond risk issues, the financial sector is influential in our societies, so that “improving access to information on sustainability performance and promoting financial literacy” can be beneficial also with this regard),
  • how we clarify investors’ fiduciary duty regarding ESG and long-term sustainability (the HLEG’s interim report had recommended that the Commission clarify that these aspects should be explicitly integrated in the fiduciary duties of institutional investors and asset managers, and the final reports highlights the need to for example strengthen director duties and stewardship principles),
  • how policies support the mainstreaming of the integration of ESG and climate issues in financial activities (much can – and has to – come of course from the financial sector, but regulatory and supervisory support from policy-makers would also be very valuable and needed, as for example with a broadening of the role and capabilities of the EBA, ESMA and EIOPA, or with a EU Green Bond Standard).

In this context, the mainstreaming of the integration of financial issues in finance can be seen as an overarching goal (as said page 75: “A financial system that fully supports the EU’s sustainability targets will be characterized by lending and investment processes into which ESG considerations are systematically integrated”). For example, it is noteworthy that the HLEG recommends changes “across the entire investment chain” and effective disclosure “covering financial products, financial assets, financial institutions and financial authorities”. In other words, in a way that can be limited only to some financial activities or financial assets.

As we like to say, sovereign assets (for example) also matter! Another condition will be that climate and ESG analysis on the one hand and financial analysis on the other are integrated more directly to each other. While we should become more aware of the fact that financial stability and performance also depends on sustainability factors, climate and ESG analysis should be developed with even more attention to long-term financial issues.

In this regard we are pleased to see that the HLEG’s final report also includes a full part on “Credit Ratings and Sustainability Ratings”, and recommends that: “CRAs should systematically integrate relevant ESG factors and factors related to longer-term sustainability into their credit risk analysis and credit ratings”.

Guillaume Emin, Project Manager



Sovereign Risk

United States financial markets under pressure: pay attention to the yield curve…

On Friday February 2nd, the U.S. 10-year Treasury yield jumped to 2.85%, its highest level since January 2014, while its 2-year counterpart increased to 2.16%, its highest level since … September 2008, a few days after the collapse of Lehman Brothers. At the same time, global stock markets were disturbed by these jolts on the U.S. bond market. The S&P 500 experienced its worst day since May last year, losing more than 6% in two consecutive trading days.

United States: Equity vs Bond markets

The main reason leading up to this sell-off: wage growth at its fastest annual rate in almost a decade in January (+2.9%). It was enough to revive fears about … inflation. All this suggests that the U.S. economy could reach the end of its very long cycle earlier than it appears. Indeed, by taking a look at the above chart, we can see that the 10-year/2-year Treasury spread recently tightened between 50 and 70 bps, its lowest level since October 2007. We must keep in mind that since the 1970s, every U.S. recession has been preceded by a yield curve inversion, while every yield curve inversion has been followed by a recession. And it takes 12 months on average from inversion to recession. To be continued…

Sources: Beyond Ratings, Datastream



SDG performances: a way to reveal GDP?

SDG Scores and GDP

On a yearly basis, the Bertelsmann Stiftung and Sustainable Development Solutions Network (SDSN) publish a SDG index and a dashboard reports that gather data for the 17 Sustainable Development Goals and for a large scope of countries. Considering an equivalence between SDGs (e.g. poverty is as important as life on land), the structural (logarithmic) relationship between sustainable performance and economic growth is strongly confirmed, but some countries appear as outliers. For example, Qatar has the same SDG score as El Salvador whereas its GDP per capita is fourteen times higher. Similarly, Greece and the United States of America reach an equivalent sustainable performance despite a huge GDP gap. Various explanations can be proposed such as a fossil fuel rent dependency (Qatar, United Arab Emirates, Saudi Arabia), disproportionate financial sector share in GDP (Luxembourg, United States of America) or an inappropriate use of wealth from a long-term perspective. Another group of countries from the ex-USSR zone of influence stand out: Armenia, Ukraine, Kyrgyzstan, Moldavia, Uzbekistan, Belarus and Tajikistan, all of which outperform their expected value. Such countries merit a deeper analysis and higher consideration.

Sources: Beyond Ratings, WB, SDG Index


Carbon/Climate Change

For a few million tonnes of oil equivalent less


Primary energy consumption in the EU, 2016 (in million tonnes of oil equivalent, Mtoe)

Eurostat just released data on the European Union’s energy consumption, in relation with the EU’s target known as the “20% energy efficiency target”. Based on this target, the EU is committed to cutting energy consumption by 20% by 2020 compared to projections. This means that we should consume not more than 1483 Mtoe of primary energy and 1086 Mtoe of final energy in 2020. In absolute value, this means that primary energy consumption should still be reduced by 4% more (and final energy consumption by 2%). After a strong increase until 2006, energy consumption has decreased strongly (for a large part due to the 2009 economic crisis). However, 2016 (the latest available data) did not send a very positive signal. It is the first consumption increase that lasted more than 1 year since 2006, with a 2-year increase in both 2015 and 2016. So much so that primary energy consumption returned to a level closer to the initial 1990 starting point (in absolute value) than to the 2020 target. 2017 data are not yet available, but it will be particularly interesting to monitor this evolution and to also see what will happen in the next 3 years.

Sources: Beyond Ratings, Eurostat





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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; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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