Global sustainability cannot be achieved without sustainability in the world’s poorer countries—so how can we address the challenges of sustainable investing in emerging markets sovereigns?

Environmental, social and governance (ESG) considerations are becoming more important for many investors, and in some cases asset owners demand explicitly that the traditional return objective is complemented by advancement in sustainability goals. At Neuberger Berman, we do not consider sovereign bond issuers an exception to these ESG demands.

We acknowledge the challenges involved in assessing and ranking sovereigns through the lens of sustainability, especially in the emerging world. However, given the relationship between ESG and credit ratings, and the critical role that sovereigns must play to overcome some of the world’s biggest challenges, in this paper we conclude that neglecting sovereign sustainability is simply no longer an option.

Executive Summary

  • The growing importance of emerging markets to the global economy means that global sustainability cannot be achieved without sustainability in the world’s poorer countries.
  • But there are big challenges: slow progress on the UN Sustainable Development Goals has been set back again by the COVID-19 pandemic; and it will continue to be held back by a lack of reliable data, biases in existing data, a lack of focus on the most critical SDGs, a lack of consistent regulatory guidance for investors and a lack of a coherent framework for approaching sovereign sustainability.
  • We describe an approach that aims to deal with these challenges by taking a holistic view of the concept of sovereign sustainability, with the aim of bringing it somewhat in line with the better-established concept of corporate sustainability:
    - Fully understanding the role and particular challenges of sovereign engagement
    - Minimum standards and exclusion policies
    - Taking a country-specific approach to particular environmental and social sustainability goals
    - How to think about sovereign “labelled bonds”

Correlations of ESG-Related Indicators with National Income

Conference Board U.S. Leading Economic Index, six-month change (in %) 

Source: Ekaterina M. Gratcheva, Teal Emery, and Dieter Wang. “Demystifying Sovereign ESG” EFI Insight-Finance. Washington, DC: World Bank, 2020. Data providers: FTSE Russell/Beyond Ratings, ISS, MSCI, RepRisk, Sustainalytics, and Vigeo Eiris.