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Pricing ESG risk in sovereign credit: an emerging divergence

In 2019, we partnered with research house Beyond Ratings to demonstrate a robust relationship between environmental, social and governance (ESG) scores and sovereign credit-default swap (CDS) spreads. In the second instalment of this two-part paper, we consider whether the results differ for developed and emerging markets.

Our study from last year uncovered an inverse relationship between country-level ESG scores and government CDS spreads: the countries with lower ESG scores have the widest CDS spreads, while those with the highest scores have the tightest spreads.

But do our findings hold up if we look at developed and emerging markets separately? In order to find out, we adopted the analytical techniques from our previous study and split the dataset into developed and emerging markets.

Some of the key questions our study asks include:

  • Is the relationship between ESG scores and CDS spreads more significant for developed or emerging markets?
  • Do any of the ‘E’, ‘S’ or ‘G’ sub-risks have a stronger relationship with CDS spreads?
  • How can country-level ESG factors affect credit risk in emerging markets?

To delve into our findings and to understand our underlying methodologies, read the full report.

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