ESG and Sovereign Risk

Wednesday 13 October 2021


In this paper, we examine the materiality of ESG on country creditworthiness from a credit risk analysis viewpoint. To address this, we consider a granular set of 269 indicators within the three ESG pillars to determine what the sovereign bond market is pricing in. From this set of ESG metrics covering the 2015-2020 period and 67 countries, we first determine the ESG indicators that are most relevant when it comes to explaining the sovereign bond yield, after controlling the effects of traditional variables such as economic strength and credit rating.

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What is Priced in by the Bond Market and Credit Rating Agencies?