AXA Investment Managers has developed a framework for analysing countries according to environmental, social and governance (ESG) criteria and reveals two ways investors may apply this to sovereign debt portfolios.
A research paper by AXA IM’s Responsible Investment team, ‘Sovereign debt investing: ESG framework and applications’ outlines two ways that investors can draw upon ESG analysis for their sovereign debt portfolios. The first addresses investors’ desire to limit reputational risk by screening the investment universe using specific ESG criteria before the portfolio construction phase.
Secondly, the research examined how an ESG overlay would impact a sovereign debt portfolio’s key characteristics. The study showed that an ESG overlay within defined risk parameters does affect country allocation and can improve the ESG performance of a sovereign debt portfolio while having a limited impact on other key portfolio characteristics including quality and duration.
The top ESG over-weights for emerging markets were Poland and Chile.
For developed markets, Spain topped the list for its better than average ESG score, despite a poor S&P long-term rating and gloomy economic prospects. The top ESG under-weights for emerging markets were the Philippines, Colombia and Indonesia. For developed markets, Japan was the largest underweight largely due to governance issues.
