Environmental factors are increasingly considered by ESG risk and score providers as a growing source of sovereign credit risk. How to implement policies to ensure sustainable environmental performance that will help governments increase their ESG score was the main topic of the project.
The Capstone team began by conducting research on the existing landscape of ESG sovereign risk providers. Within the environmental pillar, there is little coordination as to what factors should be used to assess a country’s performance. The team provided a recommendation for an alternative evaluation framework focused around four pillars: energy, climate, natural resources, and innovation. This qualitative and quantitative methodology allowed us to identify 5 sovereigns with the most progress in environmental performance. Thanks to a robust data pinning, the framework has a strong analytical backbone. This research was complemented with a comprehensive overview of the global regulatory landscape within these pillars.
The rest of the semester was spent conducting deep-dive case studies from a diverse set of countries, namely the United States, Germany, China, Uruguay and the United Arab Emirates. The team was able to identify policies that have contributed to strengthening their environmental performance and draw inferrals from data to determine policy results. Among some of the policy highlights are: circular economy, renewable energy minimums, electric vehicles support and carbon cap and trade. The findings from this research will help financial institutions make timely recommendations to governments that will help them manage environmental sovereign risk and increase their commitments towards mitigating climate change.