1st International Conference on Business Management Universitat Politècnica de València, 2015 DOI: http://dx.doi.org/10.4995/ICBM.2015.1312
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND 4.0)
The impact of a country environmental performance on its country risk
The purpose of this paper is to analyze the existing relation between the environmental proactiveness of the countries and the risk of investing in them. For this purpose, two main indicators were considered: a) the Environmental Performance Index (EPI), as a measure of the environmental proactiveness of the countries and b) the Country Risk Score (CRS), as a measure of the risk of investing in a country.
Environmental Performance Index and Country Risk Score
The EPI ranks how well countries perform on high-priority environmental issues in two broad policy areas: protection of human health from environmental harm (Environmental Health) and protection of ecosystems (Ecosystem Vitality). The EPI scores country performance in nine issue areas within these two main policy objectives (see Table 1)
Table 1. EPI components
Environment Health Ecosystem Vitality
Health Impacts Water Resources
Air Quality Agriculture
Water and Sanitation Forests
Fisheries Biodiversity and Habitat
Climate and Energy
Source: EPI data
According to Hsu et al., 2014, the EPI gives access to important environmental data organized in a way that is useful to policymakers and drives productive competition. The EPI allows countries to compare their performance to other countries. With the inclusion of time series data, countries can also see how their own performance has changed over time.
On the other hand and from an international investor point of view, country risk ratings are good indicators to measure the current situation of a country regarding measures of economic, political and financial Risk. In this study, we use the CRS underscored by the Euromoney Agency which combines the following categories: political risk, economic performance, debt indicators, structural assessments, access to bank finance/capital markets and credit ratings (Table 2).
Table 2. CRS categories
Categories Indicators
Political Risk Corruption, government stability,etc.
Economic Performance Bank stability, risk, etc.
Debt Indicators Total debt stocks to GNP, etc.
Structural Assesment Demographics, Hard Infrastructure, etc.
Access to bank finance Country’s accessibility to int. markets, etc.
Credit ratings Nominal values assigned to ratings,etc.
Source: Euromoney Agency
The impact of a country environmental performance on its country risk
1st International Conference on Business Management
Results
The regression models for country risk were built considering country risk index as dependent on the environmental indicators. Regression coefficients, help us to determine how much Country Risk increases or decreases when Environmental Health and Ecosystem Vitality of the country changes. Moreover, we can evaluate if Environmental Health and Environmental Vitality have a significant impact on Country Risk.
Results indicate that Environmental Health and Ecosystem Vitality taken in isolation have both a significant impact in determining the Country Risk.
As we have previously commented, we think that country risk is affected by the area on which countries are located. Euro crisis, has demonstrated that because of the heavy interrelation between eurozone economies, country risk in one European country can affect other countries in the area (Cervelló-Royo et al. 2014). Moreover, the political stability in the area can affect country risk. Therefore, we decided to control for country location in a geopolitical area. We created dummy variables to analyze the effects of the area on the economic Country Risk Index and we run a multivariate qualitative analysis including the area dummies and different regression to confirm the second hypothesis.
Conclusions
Results obtained from the analysis confirmed that components of Environmental health and Ecosystem Vitality are good predictors for the Country Risk Index. In addition, controlling for the geopolitical location of the country, Environmental indicators are even better predictors. Those results should encourage governments, analysts, rating agencies and users to go beyond traditional country risk analysis (political risk, economic performance, debt indicators, etc.) and incorporate measures of environmental performance when assessing the risk of investing in a country and/or geographical area. We created dummy variables to analyze the effects of the area on the economic Country Risk Index and we run a multivariate qualitative analysis including the area dummies and different regression to confirm the second hypothesis. From this analysis we can state that Environmental health and Ecosystem Vitality are good predictors for the Country Risk Index. In addition, controlling for the geopolitical location of the country, Environmental indicators are still good predictors
Acknowledgements
This publication is part of the Program for Assessing and Resources sets R + D + i VLC / CAMPUS and has been funded by the Ministry of Education, Culture and Sports as part of the Campus of International Excellence Program. The authors would like to thank the Universitat Politècnica de València (UPV) for the support through the grant number: PAID-06-14 to the project SP20140647 “Identification of moderating factors in the eco-innovative orientation of society. A social innovation approach”
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1st International Conference on Business Management Universitat Politècnica de València, 2015 DOI: http://dx.doi.org/10.4995/ICBM.2015.1313
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND 4.0)