A measure of how ESG factors influence sovereign debt investing shows that government bond-yield spreads of the best overall ESG performers are about 70% lower than those of the worst, but investors are still underestimating environmental or climate risk, according to a joint report by global risk analytics company Verisk Maplecroft and fixed-income specialist BlueBay Asset Management.
Along with investors underestimating environmental or climate risk, markets do not appear to be pricing in those risks, the report released May 24 found. The most climate change-exposed countries are also the most biodiverse, while investors still appear to prefer countries with ineffective environmental regulations and those not making efforts to decarbonize, the report said.
By contrast, governance performance is considered particularly important, with improvement leading to reduced yield spreads. "We saw more of a relationship for the S and the G," said My-Linh Ngo, head of ESG investment risk at BlueBay Asset Management, in an interview. When it comes to the E environmental factors, "the markets are mispricing it or ignoring it completely. We would like to explore that a bit further."
Intended to support more sovereign ESG investing, the report analyzed data in 198 countries, using over 80 risk factors intended to differentiate factors material to investment behavior. It also quantifies the relationship between ESG and sovereign bond pricing in 97 developed, emerging and frontier markets from January 2013 to May 2018.
