Global risk analytics company Verisk Maplecroft has developed ratings that it says set a new global standard for analysis of environmental, social and governance (ESG) risks and opportunities across sovereign issuers, with important implications for driving positive change in the world.

Some asset managers, like Amundi and BlueBay, have worked with Verisk Maplecroft to build proprietary models drawing on a subset of its 1200+ indicators, but the firm said its new sovereign ESG ratings “take this one step further”.

“We have designed the ratings to help investors of all types, including asset owners and managers large and small, to efficiently put ESG at the centre of their investment processes,” the firm said in a whitepaper.

“To the extent the ratings succeed in doing this, they will also help ensure that the true cost to governments of their ESG externalities, and the true value to them of ESG opportunities, will begin to be more efficiently reflected in market pricing.”

James Lockhart Smith, head of markets at Verisk Maplecroft, told IPE that most of the data ecosystem for sovereign debt “is moribund and not fit for purpose”, with a lack of good data – being lagging, for example – and the lack of a common standard that investors can rally around.

“Our new dataset aims to move the industry forward on both counts,” he said.

Built in consultation with a number of large investment houses, the firm’s sovereign ESG ratings draw on around 350 of the firm’s 1200+ indicators across 37 separate issues and nine ESG dimensions. Countries are analysed on a quarterly basis.

James Lockhart Smith, Verisk Maplecroft

James Lockhart Smith, Verisk Maplecroft

The indicators are based on geospatial, unstructured, structured and expert-scored sources. And rather than being based on averages of different factors, the firm has introduced a cluster analysis-based methodology that it says is tailored to “the non-linear world of sovereign ESG”.

“We would argue that the approach does a better job of identifying what matters, especially when it comes to momentum,” Lockhart Smith told IPE.

Materiality evidence

According to Verisk Maplecroft, research using its ratings, which include six years of historical data, has been able to clarify the nature and scope of the materiality of ESG factors for sovereign debt.

The firm found that social risks, not just governance risks, play a significant role in shaping market pricing. More specifically, its research found that the best performers on human and labour rights enjoy spreads around half as narrow as those of the worst performers, even when controlling for important factors such as that country’s level of income.

“The surge in interest in sovereign ESG investing points to how a trusted standard that robustly assesses government bond issuers is needed more than ever”

David Wille, Verisk Maplecroft principal markets analyst

The research also found that, in contrast to the recent past, environmental issues, in particular transition risk, have become key factors for debt pricing as investors respond to climate risks.

The firm also said that sovereign bond markets were still highly inefficient at pricing in ESG issues, sometimes taking up to a year to reflect significant shifts in a country’s risk environment.

In this context, changes in environmental and governance factors within its ratings had become leading indicators of movements in market sentiment on sovereign bond issuers.

“With access to Verisk Maplecroft’s sovereign ESG ratings, investors of all types will be better positioned to anticipate how changes in a sovereign’s ESG risk profile can impact debt pricing,” said Lockhart Smith.

“Users can track how a country’s sustainability performance is evolving and watch for approaching ESG tipping points to help minimise downside risks and identify emerging investment opportunities.”

His colleague David Wille, Verisk Maplecroft principal markets analyst who led the development of the ratings, added: “Governments are, or should be, the guarantors of last resort when it comes to human rights, prosperity and the protection of natural capital and the climate. The surge in interest in sovereign ESG investing points to how a trusted standard that robustly assesses government bond issuers is needed more than ever – this is where we aim to make the difference.”

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