  In this paper, we examine the materiality of ESG on country creditworthiness
from a credit risk and fundamental analysis viewpoint. We first determine the
ESG indicators that are most relevant when it comes to explaining the sovereign
bond yield, after controlling the effects of traditional fundamental variables
such as economic strength and credit rating. We also emphasize the major themes
that are directly useful for investors when assessing the country risk premium.
At the global level, we notice that these themes mainly belong to the E and G
pillars. Those results confirm that extra-financial criteria are integrated
into bond pricing. However, we also identify a clear difference between
high-and middle-income countries. Indeed, whereas the S pillar is lagging for
the highest income countries, it is nearly as important as the G pillar for the
middle-income ones. Second, we determine which ESG metrics are indirectly
valuable for assessing a country's solvency. More precisely, we attempt to
infer credit rating solely from extra-financial criteria, that is the ESG
indicators that are priced in by credit rating agencies. We find that there is
no overlap between the set of indicators that predict credit ratings and those
that directly explain sovereign bond yields. The results also highlight the
importance of the G and S pillars when predicting credit ratings. The E pillar
is lagging, suggesting that credit rating agencies are undermining the impact
of climate change and environmental topics on country creditworthiness. This is
consistent with the traditional view that social and governance issues are the
main drivers of the sovereign risk, because they are more specific and less
global than environmental issues. Finally, taking these different results
together, this research shows that opposing extra-financial and fundamental
analysis does not make a lot of sense.
