Insight Investment has launched a country rating model to explore how environmental, social and governance (ESG) factors affect sovereign debt portfolios.
The model would link sustainability and individual country risk against a backdrop of rising political and economic uncertainty.
According to Insight Investment’s senior ESG analyst, Joshua Kendall, the model’s findings showed that most countries’ ESG performance deteriorated and the governance was on a downward trend across more than half of developed market countries.
“Sovereign debt investors need more information to make informed decisions about the extent to which ESG factors are reflected in market prices,” Kendall said.
“We developed this model in response to client interest and expect to refine it over time as the quality and quantity of third-party research and data grows.”
Initial insights included:
- Countries with higher GDP per capita typically had better ESG scores.
- More countries were deteriorating on ESG than improving – with the majority of developed markets receiving a negative ESG momentum score.
- ESG momentum had a weak relationship overall with standard industry measures of sovereign credit risk.
- New Zealand was the best performer thanks to its robust institutions and governance, stable social relations with a broad acknowledgement of human rights based on the rule of law, and limited exposure to environmental risks.
- Afghanistan was the worst performer due to many years of conflict which resulted in a politically and socially unstable system, with little data is available on environmental factors.