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Importance of ESG factors in sovereign credit ratings

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  • Pineau, Edouard
  • Le, Phuong
  • Estran, Rémy

Abstract

This paper analyzes the importance of Environmental, Social and Governance (ESG) factors in sovereign credit ratings, by using a two-step, data-driven methodology. First, we build ESG and non-ESG (macro-financial) meta-variables from observed data using factor analysis. Second, by employing a statistical shadow rating model, we compute variable importance scores to explore the relative importance of ESG and non-ESG factors in sovereign creditworthiness assessment. We analyze the ESG importance according to the level of economic development and by different geographic areas. In particular, we find that the importance of ESG factors is different in emerging market and developing economies (EMDEs) and in advanced economies (AEs): governance is the most important factor for AEs and non-ESG factors drive the creditworthiness of EMDEs. Lastly, the relative importance of ESG factors is tracked at different dates between 2002 and 2018. We show that the evolution of ESG importance also depends on economic development: it grows for AEs and decreases for EMDEs, especially after the 2008 financial crisis.

Suggested Citation

  • Pineau, Edouard & Le, Phuong & Estran, Rémy, 2022. "Importance of ESG factors in sovereign credit ratings," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322002203
    DOI: 10.1016/j.frl.2022.102966
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    Cited by:

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    2. repec:fst:rfsisf:v:8:y:2023:i:special-june_2023:p:117-128 is not listed on IDEAS
    3. Jorge Antunes & Peter Wanke & Thiago Fonseca & Yong Tan, 2023. "Do ESG Risk Scores Influence Financial Distress? Evidence from a Dynamic NDEA Approach," Sustainability, MDPI, vol. 15(9), pages 1-32, May.
    4. Umar, Muhammad & Mirza, Nawazish & Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2022. "ESG scores and target price accuracy: Evidence from sell-side recommendations in BRICS," International Review of Financial Analysis, Elsevier, vol. 84(C).
    5. Komalpreet Kaur & Daniela Corina Oprea (Bîrlă) & Raluca Simina Bilți & Vanina Adoriana Trifan, 2023. "From corporate social responsability to environmental, social, governance investing: non-financial reporting - benefits and legislative implications," Journal of Financial Studies, Institute of Financial Studies, vol. 14(8), pages 117-128, June.

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    More about this item

    Keywords

    ESG; Variable importance; Sovereign ratings;
    All these keywords.

    JEL classification:

    • 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

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