Investing in Emerging Markets: Environmental Performance and its Effect on Risk Profile

Abstract: Debt has gained paramount importance for policy makers, stakeholders, and investors due to its far-reaching implications on economic stability, growth prospects, and financial resilience. Meanwhile, environmental conditions are increasing in importance when assessing credit risk. This study examines the relationship between environmental risk, environmental progress, and credit default swap (CDS) spreads in emerging economies. The findings reveal a significant positive impact of environmental risk on CDS spreads. However, there is no sufficient evidence for the effect of environmental progress on CDS spreads. The results have implications for sovereign debt investment, risk assessment, and sustainable policies. The results also highlight the amplified influence of environmental factors during economic downturns and the complex dynamics within emerging economies. While acknowledging limitations, we suggest future research explore broader implications, economic conditions, and standardized frameworks for incorporating environmental considerations in risk assessment.