A forward-looking approach to assessing sovereign sustainability
Our proprietary framework provides a differentiated view of sovereign sustainability and how this may affect sovereign credit risk.
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We created the Sovereign Sustainability Forum to help facilitate information sharing and analysis of the key sustainability trends, risks and opportunities for major economies. We believe that traditional sovereign ESG scores may be obscured by income bias.
Our proprietary assessment framework, combining quantitative data with bottom-up qualitative research, is designed to look beyond current-state indicators to build an understanding of the direction of travel in G20 countries. This helps provide us with a differentiated lens for sovereign bond investors.
Having completed bottom-up analysis of the key G20 countries within the Forum, three headline findings emerge:
- First, governance risks – corruption and political instability – underpin the sustainability risk profile across the G20, affecting both developed and emerging markets. While typically considered an emerging market concern, recent events in several developed economies demonstrate that governance fragility can reprice sovereign credit in any market
- Second, demographic pressures represent one of the most underappreciated long-term fiscal risk within developed G20 economies.
- Third, emerging market G20 members offer sustainability-linked investment opportunities that are not reflected in traditional ESG scoring frameworks.
Sovereign sustainability analysis helps deepen our understanding of risks and opportunities at the sovereign issuer level and helps enable us to develop a forward-looking view on their long-term sustainability outlooks. This helps us better identify where the consensus view may not fully capture emerging sustainability risks and enables us to build our own view of how sustainability risks may affect sovereign credit risk.
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