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Environmental Analysis and Sovereign Bonds

December, 03 2012
Integrating ecological risk in sovereign credit risk models and investments


Most investors have long thought that the traditional economic indicators —and more recently, high-level environmental and political factors — were sufficient to comprehensively understand country-level competitiveness and the robustness of their economies. However, we live in an ever-more ecologically and fiscally constrained world. This is not only evident from the on-going debt crisis, but also from climate change, water scarcity, food shortages, deforestation and the many other environmental crises that we face today. Current consumption, demographic and environmental degradation patterns mean that these sorts of issues could influence the resilience of countries to deal with such changing environmental patterns in the medium to long-term. Thus, the risk frameworks that are currently being used to assess the exposure of financial products to creeping local, national and global risks must better reflect the interconnected and systemic nature of the 21st century.


Launched in 2011 by the partnership of the UN UNEP FI with fifteen international investors and Global Footprint Network (GFN), this initiative proposes a custom-made method to include the environmental risks in the analysis of country risks. The target is a question of filling a weakness in bond analysis: although the environment infers ” emergent systematic risks “, the evaluation stays marginally and no investor or rating agency integrated  these ESG risks at the heart of country analyses.




Notation Agencies : Business as Usual


In the light of the appeals for a bigger supervision and to more regulations from the rating agencies, these agencies would have the opportunity to show their leadership by taking a more proactive approach. Along the launch of the initiative, the UNEP-FI and its partners had invited Standard and Poor’s, Fitch and Moody’s to participate in the project. Unfortunately Moody’s did not answer, Fitch declined and only Standard and Poor’s demonstrated some interest, but not to the point to join the initiative. While a project of European rating agency is in debate in Brussels, this situation could change soon? Let’s hope that the phase two of E-RISC, in preparation, will bring some breaches !