Public Fixed Income

ESG Engagement in Sovereign Debt: Key Questions That Must be Asked

January 2023 – 7 min read

When it comes to emerging markets sovereign debt, successful engagement often comes from asking the right questions and monitoring the right metrics.

Engaging with sovereigns on environmental, social and governance (ESG) topics is distinctively different from engaging with companies—and in most cases, less straightforward. There are key considerations that raise complicated (but necessary) questions for the investment community. For example, what does it actually mean to engage with sovereigns on ESG? Should it be about lecturing finance ministers and central bank governors on issues related to freedom of the press, violence against minorities, or lack of progress on environmental issues?

Reflecting on this has led us to think about further fundamental questions around what ESG engagement means for sovereign debt investors—including if there is a best way to engage, what topics to engage on, and whether the process is actually worth it.

Why Sovereign ESG Engagement is a Category of Its Own

Large asset managers hold power in the financial markets, and the broader economy, when they decide where to allocate capital. In corporate asset classes (equity and fixed income), asset managers hold the equity or debt of companies on behalf of clients—they effectively own the company, at various levels of seniority. The increasing focus on ESG engagement and stewardship in general in the asset management industry acknowledges this influence. It aims to ensure the industry can generate value for clients while also positively impacting wider stakeholders. Moreover, in equity and corporate fixed income classes, it is often easier to establish that good performance in terms of environmental, social and governance practices has the potential to boost financial returns. As a result, it tends to be easier to align ESG interests between investors and companies, and to make ESG engagement more successful in those asset classes.

However, this framework does not apply to sovereigns. Sovereign debtholders (fortunately) do not own the countries they invest in, and there is no consensus on what it means for countries to be “good performers” in terms of ESG. Moreover, investors do not have the means to effect direct and immediate change on a country’s policies. Therefore, sovereign ESG engagement raises questions that do not exist for corporates in terms of effectiveness, format, scope and legitimacy.


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Kawtar Ed-Dahmani

Managing Director, Emerging Markets Sovereign Debt

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