Despite its size and importance, the sovereign debt market has been the subject of less systematic environmental, social and governance (ESG) consideration than other investment asset classes. However, appetite for ESG integration is growing among investors, with a rising number appreciating that ESG factors can and do affect sovereign debt ...Find out more
The ESG in credit ratings initiative aims to enhance the transparent and systematic integration of ESG factors in credit risk analysis. The PRI is facilitating a dialogue between credit rating agencies (CRAs) and investors to cultivate a common language, discuss ESG risks to creditworthiness and bridge investor-CRA disconnects.
Principle 2 of the six Principles encourages investors to be active stewards of their investments and incorporate ESG factors into their ownership policies and practices across different asset classes.
In fixed income, a key application for ESG information is to inform analysis of issuer creditworthiness. ESG issues, such as corruption or climate change, are potential risks to macro factors that may affect an issuer’s ability to repay its debt.
Fixed income investors apply ESG filters or screens to their investment universe to control which issuers or securities are considered for investment. This is an effective way of ensuring their investments are aligned with their (client’s) ethical motivations and reduces reputational risks.
Debt and equity holders both stand to benefit financially from successful engagements, as ESG-related risks are mitigated and opportunities maximised.
Case studies by Massachusetts Bay Transport Authority and Breckinridge Capital Advisors
Case study by Itaú Asset Management
The importance of ESG issues in assessing fixed income assets and the latest developments in ESG incorporation were hotly debated in San Francisco at our first full-day fixed income conference.