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Fixed Income

ESG for Sovereigns: One Size Does Not Fit All

November 2019 - 16 min read

ESG has risen to the forefront of many investment strategies over the last decade. At Barings, our EM Sovereign Debt team takes a country-by-country approach, assessing ESG factors in the context of sustainability and—ultimately—creditworthiness.

Environmental, social and governance (ESG) themes have risen to the forefront of many investment strategies over the last decade, but there are still significant inconsistencies in how ESG is integrated into the analysis of sovereign issuers. In our view, ESG cannot be summarized in a few regression or data compiling exercises. Instead, we believe ESG factors should be considered on a case-by-case basis. In particular, we believe a focus on what makes for sustainable institutions helps us identify countries with policies that will lead to sustainable growth, sustainable debt and sustainable returns for investors.

In considering how an ESG framework can be applied to the analysis of sovereign issuers, a few key questions must be addressed:

  • Is the approach meant to support specific values such as democracy, equality, women’s rights or others?
  • If so, how do we prioritize these objectives if there are tensions among them?
  • Should investors reward a level of achievement or a trend that indicates progress?
  • Do these considerations represent additional measures of creditworthiness and sustainability that generate better—and more sustainable—returns for clients?

Some investors prioritize risk exposures rather than specific values, which leads them to focus on areas of social risk rather than the social responsibility of governments. In this approach, for example, they might assign a poor ESG rating to a country hit by an unexpected wave of refugees from a neighboring war. Meanwhile, others look more closely at development outcomes, such as educational levels or the efficiency of the health system. In this case, they might assign lower ESG scores to countries with fewer hospital beds per capita.

A more effective approach, in our view, is a dynamic analysis that takes into account the institutional specifics of each country and its current trends toward progress.

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