Industry Updates

MSCI downgrades Russian sovereign debt to lowest ESG rating

The second downgrade on MSCI Russia's ESG Government Ranking since the invasion of Ukraine began

Jamie Gordon

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The world’s largest index provider MSCI has downgraded Russia’s ESG Government Ranking from B to CCC with immediate effect.

The move sees the country’s sovereign debt pegged at MSCI’s lowest ESG rating and follows a previous downgrade from BBB to B on February 28.

It reflects what MSCI described as “extraordinary circumstances”, with international sanctions and financial isolation increasing Russia’s ‘economic environment’ and ‘financial governance’ risks.

These risks include the decision by North American and European political bodies to block Russian central bank access to international reserves,sanctions on Russian individuals and companies, the barring of seven large Russian banks from the SWIFT payments system and the withdrawal of large companies including Visa, MasterCard, KPMG, PwC and HSBC.

Interestingly, MSCI said it saw uncertainty around key metrics but noted the “annual input data used in our model do not yet capture Russia’s invasion of Ukraine”.

In a statement, the firm continued: “We consider that some of the historic quantitative data used in our methodology are no longer accurate indicators for the level of risk faced by Russia on these key ESG issues, which has created a higher degree of uncertainty, and therefore risk, for these metrics.

“We have therefore adjusted Russia’s ‘Economic Environment’ and ‘Financial Governance’ scores downward to zero, in line with its ‘Political Governance’ score, leading to an overall ESG Government Rating downgrade to CCC.

"The score for remaining categories covering ‘Natural Resources’, ‘Environmental Externalities and Vulnerabilities’, and ‘Human Capital’ are unchanged.”

The index provider’s ESG research team is undergoing Sovereign Watch assessments on its Ukraine ESG Government Rating but currently retains its rating of BB with a ‘negative’ outlook.

MSCI’s decision to downgrade Russian sovereign debt’s ESG rating for a second time follows its move to remove ‘uninvestable’ Russian stocks from its index range.

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