There is little doubt that the impact of ESG factors is increasingly relevant for considerations related to international financial investment, whether it be for private assets or sovereign bonds. However, the question of how to incorporate them into country and sovereign risk models is still a developing and much discussed subject. As a multifaceted participant in the global financial markets, Goldman Sachs has a critical stake in accurately and fully incorporating ESG pillars into its country risk analysis. It therefore has been the SIPA Capstone team’s aim to deliver a holistic analysis of existing ESG-augmented country risk models as well as a comprehensive assessment of what specific ESG factors might deliver the most value to the firm’s model.
This Capstone project consisted of 3 key phases. The SIPA team first surveyed and compared the country and sovereign risk models employed by the Big Three credit rating agencies: Standard & Poor’s (S&P), Moody’s, and Fitch; as well as those of industry peers and ESG-specialist consultancies. Following compilation of a comprehensive list of ESG variables used in these models, the team conducted extensive regression and correlation analysis of these variables against the dependent variables: historical credit rating scores and 5-year government bond interest rates. Finally, the team utilized the results of their data analysis to produce a shortlist of variables they judged, quantitatively and qualitatively, to be the most valuable variables for inclusion into an ESG-augmented model.