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60 seconds on sovereign bonds and environmental, social and governance (ESG)

Drawing on the experience of our investment teams we look at how they practically integrate ESG into their sovereign bond investments with three clear conclusions.

27 June 2017

Jessica Ground

Jessica Ground

Global Head of Stewardship - ESG

Little has been written by either academics or practitioners on ESG integration into sovereign bonds.

We have sought to bridge this gap by drawing on the experience of our investment teams on how they practically integrate ESG and come out with three clear conclusions.

Investors should focus on medium to longer term issues.

  • For example in the event of extreme weather hitting a country, sovereign bonds will outperform relative to other domestic assets.

Governance and social issues should be prioritised.

  • Japan has high levels of debt but strong social cohesion and strong government institutions have enabled this to persist.
  • And we don’t ignore the environment – we have incorporated the long term impact of climate change risks into our 30 year forecasts.

Emerging markets are more vulnerable to ESG issues. Institutions are typically less developed, limiting policymakers’ ability to act in times of crisis.

  • We evaluate and monitor risks over time with on the ground visits and assess a wide range of data points.

Given the challenges that our world faces today, analysis of ESG factors in sovereign bonds has perhaps never been more important.

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