New study: sustainability ratings are a reliable indicator of countries' solvency

Munich, 16 October 2013 – There is currently a high level of uncertainty on the international financial markets, due to the budget dispute in the USA surrounding the proposed raising of the borrowing limit. The markets are waiting with bated breath to see whether the Democrats and the Republicans will be able to agree on raising the debt ceiling, which currently stands at just under 17 trillion US dollars. The key question for investors is whether the USA and other countries will be able to pay back the debts they have taken on or whether, as in the case of the debt cut in Greece, they can expect to see losses on their investments. A recent study based on sustainability rating agency oekom research’s country ratings shows that sustainability ratings are a reliable indicator of countries’ solvency and that taking sustainability ratings into account allows investors to make a better assessment of the overall risks.

The debt cut in Greece in March 2012 has hit many institutional investors. As a result of the revaluation of the bonds they made a nominal loss of 53.5 per cent on their claims. Due to the fact that the rates of interest on the new securities are effectively lower, the financial loss has been even greater. Investors who used oekom research’s country ratings as a basis for their decisions on government bond investments have not been affected by this. oekom research was already giving Greece poor scores in its sustainability rating at a time when the conventional rating agencies were still awarding it scores in the A range.

The recent study on “Sovereign Bonds and Sustainable Culture” carried out by the ICMA Centre at Henley Business School in the UK in collaboration with researchers from the universities of Hohenheim and St. Andrews confirms that this was no accident; rather, there is a demonstrable correlation between the risk of a country defaulting on its payments and that country’s sustainability culture. The study used oekom research’s country ratings as a basis for assessing countries' sustainability cultures. Dr. Andreas G. F. Hoepner, who led the study, sums up the findings of the study as follows: “The study shows that a pronounced sustainability culture, as measured by oekom research’s country rating, significantly reduces the risk of payment default. It thus confirms the importance of sustainability ratings in determining the risks of government bonds. The results of the analysis show that, for a long-term investor, factoring country sustainability ratings into the determination of risk is financially advantageous.” Agnes Neher, a member of the project team, adds, “Combining conventional financial information with sustainability ratings produces a better overall assessment of long-term solvency and thus of the risks of government bonds.”

The US has for many years received poor ratings in oekom research’s country rating and ranks far behind the countries which are recommended from the sustainability point of view. For example, the USA continues to refuse to make a constructive contribution to global climate protection, and its consumption of energy and resources remains high. Growing income inequality is increasing social tension across society. “From the viewpoint of sustainability-oriented investors, it is therefore vital, irrespective of the outcome of the budget dispute, for budget funds to be invested more heavily in areas which have a positive impact on solvency and thus on creditworthiness,” observes Matthias Bönning, Head of Research at oekom research. “This includes, for example, investment in education, infrastructure and the promotion of energy efficiency.”

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Further information can be obtained from:

oekom research AG

Rolf D. Häßler, Head of Corporate Communications, Goethestrasse 28, 80336 Munich, Germany, phone: +49 (0)89 544184-57, fax: -99, e-mail: rolf.haessler@oekom-research.com

oekom research is one of the world’s leading rating agencies in the field of sustainable investment. The agency analyses companies and countries with regard to their environmental and social performance. oekom research has extensive experience as a partner to institutional investors and financial service providers, identifying issuers of securities and bonds which are distinguished by their responsible management of social and environmental issues. More than 100 asset managers and asset owners routinely draw on the rating agency’s research in their investment decision-making. oekom research’s analyses therefore currently influence the management of assets valued at over 520 billion euros.