Sovereign debt has come under increased focus in discussions over sustainable investing in recent years, as the positions and policies taken by the governments themselves play a crucial role in meeting an ever-growing range of sustainability challenges, from Paris Agreement commitments to biodiversity issues and violent conflict. Having been strong believers of the importance of Environmental, Social and Governance (ESG) factors in sovereign debt investing since the inception of Emerging Markets Debt (EMD) funds, we continue to enhance how to assess these factors, incorporate them into the investment process and use them as a robust tool to further the sustainability agenda.
Earlier this year, we worked with our developed markets colleagues to revise the NB ESG Quotient to incorporate a number of new environmental and social factors, such as women’s representation in the labor force and decision-making bodies, deforestation and air pollution, education and research & development, which we believe present a better view of in-country ESG trends, while we streamlined and standardized some others. The NB ESG Quotient now covers 150 sovereigns across the globe, including major advanced economies as well as most of the emerging and developing countries. Our work shows that a continued emphasis on ESG factors contributes to better medium-term performance in sovereign debt markets.
We are bolstering our engagement with sovereign issuers, with a keen focus on Sustainable Development Goals and the UN Guiding Principles of Business and Human Rights. While we acknowledge that these discussions can be complicated by various political and cultural sensitivities and diverse time horizons, we think they are vital to keep sovereign issuers focused on meeting various sustainability challenges, and have seen modest yet clear improvement in some issuers’ policies as a result.
We have also introduced a screening/best-in-class policy for EMD funds which will structurally limit our exposure to countries with the weakest performance in the NB ESG Quotient or poorest human rights and rule-of-law records. We think implementing minimum standards is important in incentivizing sovereign issuers to address their ESG shortcomings and allow us to focus on those that are ultimately a better investment in the medium to long term.