60 seconds on sovereign bonds and environmental, social and governance (ESG)

Little has been written by either academics or practitioners on ESG integration into sovereign bonds.

We have sought to bridge this gap by drawing on the experience of our investment teams on how they practically integrate ESG and come out with three clear conclusions.

Investors should focus on medium to longer term issues.

  • For example in the event of extreme weather hitting a country, sovereign bonds will outperform relative to other domestic assets.

Governance and social issues should be prioritised.

  • Japan has high levels of debt but strong social cohesion and strong government institutions have enabled this to persist.
  • And we don’t ignore the environment – we have incorporated the long term impact of climate change risks into our 30 year forecasts.

Emerging markets are more vulnerable to ESG issues. Institutions are typically less developed, limiting policymakers’ ability to act in times of crisis.

  • We evaluate and monitor risks over time with on the ground visits and assess a wide range of data points.

Given the challenges that our world faces today, analysis of ESG factors in sovereign bonds has perhaps never been more important.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director james.brennan@cazenovecapital.com