The impact of ESG on sovereign risk spillover: evidence from belt and road countries

This study explores the determinants of sovereign risk spillovers among Belt and Road Initiative (BRI) countries. Using a dataset of sovereign credit default swaps (CDS) from 2010 to 2021, the empirical analysis estimates a time-varying measure of directional risk spillovers across 42 countries applying a forecast error variance decomposition (FEVD) approach in a vector autoregressive (VAR) model. The findings confirm the significant impact of sovereign-level Environmental, Social, and Governance (ESG) factors on risk spillovers, highlighting the importance of incorporating ESG considerations into risk assessments within increasingly interconnected financial networks. These results offer critical policy implications for BRI countries, underscoring the necessity for enhanced financial risk management and robust governance frameworks to mitigate the adverse effects of economic integration.