60 seconds on sovereign bonds and environmental, social and governance (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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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.