Integrating environmental risk into sovereign ratings

The failure of ratings agencies to consider the state of natural capital and operating dynamics when rating government debt hinders assessment of their trajectory towards a sustainable growth model. This limitation is particularly detrimental to emerging economies, whose investment needs represent 4% of their GDP per year to reach the objectives set by the Sustainable Development Goals for 2030.

The financial services company Beyond Ratings is therefore seeking to develop a methodology integrating environmental issues into sovereign risk assessment. As such, the FFEM is playing a part in creating an innovative financial ratings agency.

There are two components to this project:

• Methodological innovations with academic partners to rectify the shortcomings in the current risk scoring methodology and prepare for moving towards a rating methodology specific to one ratings agency.
• Preparing the launch of the ratings agency by endorsing the project to investors, obtaining the approvals required to carry on its activity from the regulators, and finalising the economic, legal and financial structuring of the project prior to its operational launch.

• Altering the practices of institutional investors who, when making their investments, will be able to consider all the risks and opportunities attached to sovereign debts, including those linked to managing natural capital, thanks to the augmented approach to sovereign risk scoring
• Ensuring rated states bolster regulatory and fiscal policies and redirect public investments, so capitalising on their potential for sustainable means of growth

Supported by the FFEM, this project has enabled the unprecedented step of creating a new ratings agency to help accelerate the transformation of the financial industry. With its innovative governance, methodology and economic model, this project embodies a vision of the financial rating of country/sovereign risk for a public good. Another objective is to make the project as transparent, open and relevant as possible. The governance of the agency will bring together the public/private institutions involved in developing the project and its standing.