Fixed Income Subject to ESG analysis

PRIs emphasize on the importance of ESG engagement for sovereign debt investors.

The recent PRI (Principles for Responsible Investment) report supported by the United Nations, calls on sovereign bondholders to engage more on ESG issues.

Entitled – ESG engagement for sovereign debt investors – the report highlights the lack of ESG engagement of sovereign bond holders and tries to remind these investors of the importance of adopting a holistic approach, ensuring that a wide range of information is taken into consideration in addition to information relating purely to growth and inflation.

The integration of ESG issues is legitimate in both equity and bond markets – even if the tools and logics may differ. The foundation of ESG analysis remains the same, whether it is to assess the sustainability of the strategy and practices of a company, or of a sovereign country, which are the pillar of many major asset portfolios.

« Engagement on environmental, social and governance (ESG) issues is an underutilized practice among sovereign bondholders, and this needs to change.

There are many reasons for this reluctance, including concerns that engagement of this nature could be misconstrued as political lobbying, advocacy or interference with governments’ policy choices. »

Carmen Nuzzo, head Fixed Income – PRI

While these investors may fear being accused of these manipulations, they must nevertheless consider using their influence over these national authorities to produce the necessary change of conduct, encourage them to engage in ESG issues and ensure that these emitting countries are keeping their promises of sustainability.

As social and environmental challenges increase, as countries’ exposures and responses to these crises become more and more critical, we can expect that the importance of ESG risks to states and nations will increasing respectively.

Even if the performance of sovereign bonds is not linear (certain risks can cause bonds to outperform), ESG analysis must make it possible to assess the capacity of countries to adapt and prosper in the face of these transforming “forces”. industries, governments and the outlook for growth and inflation.

« ESG engagement with sovereigns allows investors to raise and promote issues they think are important in order to improve a country’s credit trajectory and long-term growth potential, and determine performance fixed income securities issued by a sovereign state. »

Kristin J. Ceva, CFA, Directrice Générale, Payden & Rygel

The PRI report therefore highlights current market practices and the differences between the engagement of sovereign and corporatebond holders.

It also provides examples of existing ESG practices and issues to enrich exchanges between investors, sovereigns and other national stakeholders with the aim of improving disclosure and discussions for the implementation of responsible investing.

«In fact, sovereign bond ESG engagement is a 360-degree process, where discussions with numerous other country stakeholders – including opposition parties, NGOs, multi-national companies, supranational organizations and credit rating agencies (CRAs) – can help to form a country view and enhance risks assessment. »

Carmen Nuzzo, head Fixed Income – PRI

Article: Joana Foglia

Post Author: Wealth Monaco

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