PT  - JOURNAL ARTICLE
AU  - Lupin Rahman
AU  - Jeremy Rosten
AU  - Pierre Monroy
AU  - Shuo Huang
TI  - Does ESG Matter for Sovereign Debt Investing?
AID  - 10.3905/jfi.2021.1.112
DP  - 2021 May 01
TA  - The Journal of Fixed Income
PG  - jfi.2021.1.112
4099  - https://pm-research.com/content/early/2021/05/01/jfi.2021.1.112.short
4100  - https://pm-research.com/content/early/2021/05/01/jfi.2021.1.112.full
AB  - ESG has become a hot topic in investment circles. In this article, we train the ESG lens on sovereign debt. We carry out an empirical analysis to assess whether environmental, social, and governance factors drive pricing and investment returns of sovereign external debt. Our major finding is that ESG considerations matter for sovereign bond investing, even after relevant macroeconomic and credit variables are taken into consideration. This is particularly the case for emerging markets, where we document evidence of an additional ESG risk premium relative to developed markets. Furthermore, by testing an ESG-focused investment strategy, we examine the hypothesis that ESG could potentially detract from investment returns. We find no evidence over our historical time frame that an ESG-focused investment strategy results in any investment disadvantage. In addition, our results suggest support for potential advantages of an active approach to ESG portfolio management.TOPICS: ESG investing, fixed income and structured finance, portfolio construction, performance measurementKey Findings▪ Our research shows that ESG (environmental, social, and governance) scores are significant drivers of sovereign credit spreads. Debt issued by countries with high social and governance scores in particular, tend to have tighter credit spreads.▪ The relationship between ESG scores and credit spreads is particularly strong for emerging market countries, where we find evidence of an additional ESG risk premium relative to developed markets.▪ We find no evidence that investors are penalized for ESG-aware investment strategies in the form of lower returns, but our analysis does support the case for in-depth ESG analysis in the context of an active approach to portfolio management.