ESG Impact Rating for Sovereigns and the example of Russia
A state first needs to ensure a strong institutional framework in place in order to guarantee its adequate preparation to deal with the challenges of sustainable development and, secondly, its preparedness and performance with respect to how it governs its people and the environment need to be evaluated to reach a robust sustainability assessment.
The conceptual framework of the Country Rating is based on a screening module and an ESG module with respective topics and criteria.
The screening module covers topics related to the institutional framework of a state. They include indicators for core responsibilities and minimum requirements for states such as human rights, governance, democracy, governance and rule of law, peace keeping, etc. as well as the signatory status of major international conventions concerning labor, human rights and the environment. These are mainly long-lasting elements which are only gradually affected by government changes or political processes. Non-compliance with screening indicators leads to the status "non-compliant" in the Inrate Rating for Sovereigns – because it is believed that the countries sustainable development is hampered in the long term by non-compliance of the criteria.
The ESG module considers a wide range of criteria, which together provide a comprehensive view of a state’s performance with respect to the environment (25% weight), the society (25% weight), and its governance practices (50% weight). The assessment of ESG module is based on an encompassing set of secondary data from publicly available, official and trustworthy sources such as UN institutions. Data are gathered for almost 200 countries and final grades are calculated for around 140 countries by applying the same methodology for all countries (due to lack of data, grades cannot be assessed for all countries).
The final ESG grade is expressed on a scale from A+ (very sustainable) to D- (not sustainable at all). By using the same scale as for the ESG impact rating of corporates, Inrate allows its customers to use the rating for the analysis of mixed portfolios.
Inrate’s ESG Impact Rating for Russia
The Russian Federation achieves only a grade of C- (scale A+ to D-) because of a high weighting of governance criteria and has always been flagged as non-compliant due to breaches of screening criteria reflected e.g. in the regime type and the corruption perception index.
Among other ESG-indicators, Inrate captures indicators that have long pointed to weaknesses in the Russian governance, such as freedom status (political rights, civil liberties), press freedom, use of force against independent states or civilians, and cooperation in international conventions including conventions against controversial weapons as well as participation to the Rome Statute of the International Criminal Court.