MSCI ESG Research has downgraded its government ratings for Russia and Belarus, from BBB to B and from BB to B respectively.
The move, which follows "a period of close monitoring" of Russia, Belarus and Ukraine amid Russia's invasion, reflects a change in the "long-term sustainability and competitiveness of [the] economies", according to the ratings agency.
Ratings range from AAA - the highest, to CCC - the lowest. MSCI's ESG government ratings, which adopt a quant-based approach, apply a 50% weighting to environmental, a 25% weighting to social and a 25% weighting to governance issues.
JP Morgan AM suspends Russia-exposed funds
The ESG ratings draw from more than 25 sources - including the World Bank Governance indicators, World Resource Institute and International Monetary Fund - and are updated annually.
In "extraordinary circumstances", some government-rated countries will be placed under ‘sovereign watch' by the agency, which assesses "exceptional events" on a scale between ‘minor' and severe.
A spokesperson for MSCI said: "MSCI ESG Research has downgraded the ESG Government Rating of Russia from BBB to B (the second lowest rating) with a Negative outlook with immediate effect.
"We are monitoring the situation closely and believe there is still significant downside risk to Russia's ESG government rating. It is possible that further developments could yet drive an additional downgrade."
The agency explained that, prior to the invasion of Ukraine, Russia's ‘Political Governance' score was already assessed as "being weak under the three categories of ‘Stability and Peace,' ‘Political Rights and Civil Liberties' and ‘Governance Effectiveness'".
"We have reduced these scores further in response to Russia's actions in Ukraine. The sovereign watch event assessment for Russia's ‘Political Governance' category that resulted in these score reductions and contributed to Russia's ESG Government Rating downgrade is now ‘Very Severe', the most severe classification," MSCI added.
Liontrust suspends Russia fund and MSCI consults on removing Russia from EM
Elsewhere, the firm downgraded Belarus from BB to B with a Negative outlook, following a sovereign watch event assessment of the country's Political Governance score in 2021.
"At that time, the rating remained unchanged at BB," MSCI said. "Today we also applied new Sovereign Watch assessments to the ‘Economic Environment' and ‘Financial Governance' scores, reducing those scores to reflect the potential impact of sanctions on the country and resulting in the downgrade to B."
While the agency has maintained Ukraine's ESG government rating at ‘BB', it has been given a Negative outlook.
