Political Risk, Sustainability and Sovereign Credit: Pricing High-frequency Political, Environmental, Social and Governance News

Do environmental, social and governance (ESG) factors affect sovereign credit risk? As E, S, and G factors (e.g., natural and human capital) are critical inputs for long-term growth, they should affect both sovereign ability and willingness to pay. Drawing on a global corpus of more than four billion news articles in sixty-five languages to identify the frequency and tone with which ESG factors are discussed daily, this research note shows that ESG factors affect creditors’ assessment of sovereign creditworthiness, even after accounting for political institutions and macroeconomic conditions. By revisiting previous work with a broader scope and more fine-grained data in an error correction model, we advance academic and practical conversations about how creditors formulate and update their expectations of sovereign creditworthiness. This project speaks to larger questions in the literature about the effects of globalization, the importance of extra-financial factors, and the pricing of information in international financial markets.