Sovereign rating methodologies, ESG and climate change risk: an overview

We review the sovereign credit rating methodologies of three credit rating agencies (Moody’s, S&P and Fitch) and analyze how they currently accommodate climate change risk and ESG considerations. We elaborate on the differences between the three rating methodologies and critically evaluate their suitability and limitations. We propose lines of improvement with respect to the indicator selection, normalization, aggregation and weighting procedures as well as the use of the sovereign rating indicator in connection with climate change scenarios.