The purpose of ESG rating is to analyse ESG risks that are ordinarily not taken into account by normal sovereign ratings. This can be used as a supplementary and integrative element in the correct assessment of country risk.
We use a risk-based approach in our methodology which assesses the ESG risks to which countries are exposed, based on their natural resources and their social and governance structure.As proposed by MSCI in their rating model, ESG risks can be seen as composed of two elements: risk exposure (e.g. the availability of water resources) and risk management (e.g. the management of available water resources).
In order to build an effective ESG rating model, information alone is not sufficient: it must be organised in a coherent way to allow comparisons.In order to do this, we use a four- step model:
i. Define a KPI scheme that covers all the possible ESG risks on a country level;
ii. Select available data sources needed to assess the value of each KPI;
iii. Weight each KPI based on their materiality;
iv. Assign an ESG Country rating based on the overall score
Finally, in order to compare the different levels of ESG country risk, we have to create a classification of KPIs that is able to summarise all the possible ESG issues faced on a country level.
For more detail on this and our indepth methodology please download the full report below.