The European Commission has developed a comprehensive European Union (EU) roadmap on sustainable finance, to be presented at today\u2019s high-level conference, bringing together European leaders to foster transparency and long-term-thinking in financial activities. Scope believes that this initiative, which also targets a unified classification system for sustainable activities, standards and labelling in the context of financial products, and support for green assets, has the potential to direct capital flows towards sustainable investing, ultimately enhancing the importance of ESG in risk management.<\/p>\n
Multiple initiatives have acted as a catalyst to make ESG an intrinsic part of the institutional investment process. However, Scope observes that the rules, regulation and taxonomy surrounding ESG remain in motion while ESG-specialised investment products are still at an early and evolving stage.<\/p>\n
Individual ESG factors impact the likelihood of sovereign debt repayment to varying degrees. An ESG factor may have a negligible impact on a sovereign rating, or it can have an impact in the very near term; in addition, many ESG factors become increasingly material over the long run. In the case of sovereign issuers, the weight of governance factors normally dominates (50% in some ESG scores), followed by social factors (35% in some ESG scores).<\/p>\n
Scope Public Finance believes that, while sovereign credit risk and ESG are distinct concepts, there are areas of overlap, ranging from influences on potential growth to long-run healthcare costs (when evaluating public debt sustainability) to political stability and governance effectiveness to financing rates and financing availability (evidenced in the inception of ESG investment benchmarks).<\/p>\n
There is a relationship between Scope\u2019s sovereign ratings and sustainability, reflecting we believe two broad influences: i) an area of overlap in Scope\u2019s methodology with some ESG risks, alongside ii) a correlation between some factors in Scope\u2019s sovereign methodology and some ESG factors, without direct inclusion in Scope\u2019s framework.<\/p>\n
Although Scope\u2019s sovereign ratings methodology includes elements of ESG, it is Scope\u2019s view that there are two avenues on how sustainability risks can be further evaluated in our sovereign approach: i) an \u201cadd-on\u201d approach or ii) a further partial integration approach.<\/p>\n
Acknowledging the inherent challenges, Scope views the further exploration of sustainability in sovereign risk as, nonetheless, an important area of research in developing a more holistic view on areas where there\u2019s overlap, from the perspective of a European rating agency.<\/p>\n","protected":false},"excerpt":{"rendered":"
The European Commission\u2019s sustainable finance plan is a step forward, in the view of Scope Public Finance. This contribution outlines Scope\u2019s views on the distinct nature of ESG and sovereign risk, their areas of overlap, and next research steps.<\/p>\n","protected":false},"author":20,"featured_media":70306,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1655,1849,1826,1682,1848,1651,1437,1685],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/70308"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=70308"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/70308\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/70306"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=70308"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=70308"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=70308"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}