The Influence of ESG Factors on Sovereign Credit Ratings in Sub-Saharan Africa: A LASSO and Random Forest Approach

This study examines the impact of Environmental, Social, and Governance (ESG) factors on sovereign credit ratings in Sub-Saharan African countries using LASSO and Random Forest models.Sovereign credit ratings, issued by major rating agencies, play a crucial role in determining a country's borrowing costs and investment attractiveness.Traditionally, these ratings have been influenced by macroeconomic factors; however, recent trends suggest that ESG considerations are becoming increasingly relevant.By applying statistical prediction models, this study assesses the relative importance of ESG factors versus non-ESG (macroeconomic) variables in credit rating determination.The results reveal that governance and macroeconomic factors are the dominant determinants of sovereign credit ratings in upper-middle-income Sub-Saharan African countries, whereas environmental factors play a crucial role in lowerincome nations.The Random Forest model outperformed the LASSO regression in predictive accuracy, reinforcing the significance of non-linear relationships in credit rating determinants.The findings highlight the necessity for policymakers to integrate ESG considerations into national financial and economic strategies to improve creditworthiness and attract sustainable investments.