Does Sustainability Reduce Country Default Risk?

Abstract

Using the CDS premium as a proxy for default risk, and studying 41 countries rated by
the social rating agency Vigeo, we show that higher country social ratings are associated with lower sovereign default risk. From the credit rating and the sustainable
Vigeo scores we highlight three independent components called social, environmental
and economic dimensions. The most valuable information for appraising sovereign
default risk comes from the environmental and the economic dimensions. By referring
to a Choquet integral methodology, we aggregate these two dimensions in an overall
score which better explains country default risk than the credit rating taken alone.