The Principles of Responsible Investment Initiative has published a paper looking at links between environmental, social and governance (ESG) factors and credit risk in the $47trn sovereign debt market.
The paper was written with input from the PRI's Sovereign Fixed Income Working Group. Formed in 2011, the Group includes representatives from 33 global pension funds, investment managers and other signatories to the PRI.
The paper has drawn on academic and industry research to gauge how ESG factors correlate with bond yields, credit ratings and investment performance. And it explores why there is a general failure by the market to factor in major ESG risks.
Key findings include:
• ESG analysis provides investors with additional insight into sovereign credit risk, with multiple studies confirming correlations between ESG factors and credit risk.
• ESG factors have proved to be material to sovereign creditworthiness and investment performance, with research suggesting sovereign debt issued by countries with higher ESG scores outperformed over the euro crisis period.
• Investors want credit rating agencies to use ESG analysis to inform their sovereign debt ratings in a more systematic way, taking into account quantitative and qualitative criteria.
To read the full report click here: Spotlight on ESG risks
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