Research Note – How ESG Can Improve Sovereign Yield Performance Analysis

Traditional GDP statistics and macro-financial indicators do not account for the whole performance of an economy. While complementary metrics have been developed over the years (e.g. UNDP Human Development Index, OECD Better Life Index, etc.) and increasing peer pressure has led to new initiatives (e.g. UNPRI ESG in credit ratings), ESG integration in Sovereign asset management has been hindered by lack of associated financial materiality. There is a need to adjust country financial wealth by its ESG performance.

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:

  • This study analyses the ability of the Beyond Ratings ESG score to explain sovereign spreads:
  • 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.
  • Combining the Beyond Ratings ESG score and augmented credit score should improve these results. This approach should be documented in a further study.

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