Country Risk Ratings

Morningstar Sustainalytics’ Country Risk Ratings integrate environmental, social, and governance (ESG) profiles and ongoing ESG-related events for a deeper understanding of country risk.

While traditional sovereign credit assessments focus on macro-economic analysis, they often overlook key ESG factors like political instability, governance, and social policies that can drive economic volatility and impact sovereign bond performance.

By combining national wealth data and over 35 ESG metrics, along with analyst-driven overlays for real-time events, the Country Risk Ratings offer a more comprehensive view of sovereign risk. Aligned with the ESG Risk Ratings, this tool allows seamless comparisons between corporate and sovereign bonds, enhancing portfolio analysis and reporting.

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METHODOLOGY AND FRAMEWORK

Assessing National Wealth Through ESG:
A Three-Capital Framework

The Country Risk Ratings assess a nation’s ability to manage its wealth sustainably through three main capitals: Natural & Produced Capital, Human Capital, and Institutional Capital. This approach is built on the World Bank’s concept of capitals and incorporates ESG factors to evaluate wealth management. Our three-step framework includes:

Step 1: Determining a Country’s Assets (Natural Wealth) Step 2: Assessing Capital Utilization and Management Step 3: Calculating Scores, Signals, and Ratings

We evaluate a country’s wealth by examining its three Capitals:

Natural & Produced Capital
Human Capital
Institutional Capital

We analyze how effectively a country utilizes its capitals, identifying risks using ESG pillars and more than 35 ESG performance metrics and data trends. The focus of the three ESG pillars are: 

Environment Pillar: Energy, climate change readiness, resource use, and governance.
Social Pillar: Basic needs, health and well-being, equity, and opportunities.
Governance Pillar: Institutional strength, regulations, rights, and freedoms.

We combine our wealth and ESG assessments to generate ratings and scores at the indicator, capital, and country level. Our quantitative research covers all Country Event severity categories, and our qualitative research focuses on events classified as significant, high and severe.

KEY FEATURES

Comprehensive Country Insights and Analysis

	Modular and Flexible Integration into Investment Analysis The modular nature of the ratings provides flexibility, enabling analysis of a sovereign’s ESG profile on its own or combined with wealth risks for a comprehensive view of ESG risk from short-term to long-term perspectives. The product covers 164 countries, offering data points in scores, letter grades, and indicator breakdowns, representing 97% of all issuable sovereign debt.

	Curated and Granular Insights Our ratings are highly correlated with industry standards, yet our curated data points focus on the most impactful insights. The scoring framework distinguishes true leaders and laggards, based on demonstrated performance rather than arbitrary metrics. Our approach ensures clear assessment of risk management, offering a balanced view regardless of wealth and income disparities.

	Full Integration for Comprehensive Portfolio Analysis Designed to complement our ESG Risk Ratings, this product facilitates complete portfolio ESG risk exposure analysis.

	Transparent, Simple, In-House Methodology Built on in-house research and methodology, our ratings provide transparency and consistency. The Country Event Classification system offers a cohesive assessment of risks through a streamlined approach.

	Qualitative Event Analysis Across All Severity Levels Our coverage includes over 300 events, with qualitative analysis that overlays ongoing material events, helping to identify the impact of diverse risk factors.

	Dynamic Ratings Reflecting Real-Time Events Updated quarterly, the ratings offer a forward-looking perspective, enabling clients to track evolving risks. Our analysts continuously adjust ratings in response to critical events, keeping you informed on the impact of news and developments.

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USE CASES

Holistic Country Risk Assessment: ESG Integration, Macro-economic Insights and Proactive Portfolio Management

Holistic Macroeconomic Analysis

Combine ESG data with wealth and economic indicators for a well-rounded assessment of a country’s economic health and associated risks.

Proactive Risk Anticipation

Utilize forward-looking Country Risk Ratings to identify and manage emerging risks. Regular updates on country-specific events support proactive decision-making.

Investment Screening

Leverage scores, ESG letter grades, and risk categories to screen portfolios for exposure to high and severe-risk countries.

Enhanced Portfolio Analysis & Reporting

Integrate Sustainalytics’ ESG Risk Ratings for corporate and sovereign bonds to perform comprehensive risk assessments. This unified approach bolsters transparency and strengthens fixed income portfolio management.

ESG Integration in Credit Analysis

Enhance traditional credit assessments by evaluating a country’s wealth and its management through an ESG perspective, uncovering risks often missed by standard credit ratings.

REPORT INSIGHTS

Comprehensive Country Risk Analysis: Ratings, Trends, and Detailed Insights