The role of Credit Rating Agencies (CRAs) in financial markets

Abstract

This report examines the impact of Environmental, Social, and Governance (ESG) factors on the sovereign credit rating system using statistical modeling. Traditionally, credit rating models focused on macroeconomic factors, but there's a growing recognition of the importance of ESG factors in creditworthiness assessment. Data from 10 countries, including ESG and macroeconomic variables, were analyzed using a multivariate regression model. The results show that ESG factors have a significant effect on the credit rating system, with ESG variables enhancing the accuracy of the rating model. The findings support the need for credit rating agencies to incorporate ESG factors into their assessment frameworks. This research provides valuable insights for policymakers and investors in evaluating sovereign debt sustainability.