Verisk Maplecroft data informs EDHEC study into impact of ESG factors on sovereign bonds

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A recent independent study by EDHEC-Risk Institute, based on our sovereign Environmental, Social and Governance (ESG) analytics, has explored the materiality of ESG factors in the risk and return profile of sovereign bonds at both issuer - and portfolio - level, finding strong results.

EDHEC-Risk Institute, a leading think-tank specialising in investment research, supported by Amundi ETF, Indexing and Smart Beta, used our data to develop and test a framework for incorporating ESG criteria into risk management and investment decisions involving sovereign bonds. Our economic risk scores were also used to control for macro factors in place of traditional credit ratings.

The authors described four key findings from the research:

  1. Developed market issuers with higher environmental scores, and emerging market issuers with higher social scores, are able to achieve lower costs of borrowing
  2. Negative screening involves less tracking error than positive screening, while positive screening translates into improved ESG scores, though at the cost of increased absolute and relative risk budgets
  3. Investors can reduce portfolio construction opportunity costs along the dimension most important to them through a dedicated focus on absolute or relative risk reduction at the selection stage
  4. ESG momentum strategies have a role to play in sovereign bond markets, insofar as issuers with the most positive trends outperform those with the worst

The report confirms that incorporating ESG factors into sovereign bond issuer analysis, investment strategies and portfolio construction is an effective risk management tool.

“We’re delighted our data could feed into this study, which echoes the findings of our own research on the materiality of ESG in sovereign debt investing, as well as our long-standing views on the role of momentum strategies,” says our VP of Market Risk, James Lockhart Smith.