Does esg matter for sovereign debt investing?
We find that ESG considerations matter for sovereign bond investors: ESG scores exhibit correlation with spread levels and dynamics and show high levels of explanatory power and significance with respect to spreads, even when other relevant variables are taken out of the picture.
After controlling for other risk characteristics our analysis points that better ESG rating is associated with lower cost of unsecured debt in the primary bond market. Our findings are consistent over the aggregate metric and all E,S, and G pillars.
- Strive U.S. Energy ETF (DRLL): $369.2 million.
- Inspire 100 ETF (BIBL): $294.5 million.
- Strive 500 ETF (STRV): $266 million.
- Inspire Corporate Bond ETF (IBD): $256 million.
- Inspire International ETF (WWJD): $193 million.
Environmental, social and governance (ESG) factors can have major implications for countries and the perceived creditworthiness of their debt. Environmental risks – such as natural disasters, weather patterns and climate change – can all have a significant effect on a country's economic and political outlook.
While there is some evidence that companies with high ESG ratings perform better financially, it is also possible that these companies are simply better managed overall and would perform well even without ESG initiatives.
A sustainability-linked loan has an extra twist: a spread discount or penalty that depends on the borrower meeting specific ESG targets. For example, a loan's interest rate may be 100 basis points over Euribor and that can be adjusted based on the borrower's ESG performance.
For some, the rise of ESG funds is a threat. They don't want to see the world use the leverage of finance and reporting to address shared challenges; it would reduce their power.
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers. They say ESG is just the latest example of the world trying to get “woke.”
Critics portrayed ESG investing as primarily motivated by political concerns and a potential drag on returns. Additionally, some critics have raised concerns about the complexity and reliability of ESG metrics.
Vanguard currently offers several exclusionary ESG products across equity and fixed income that help investors to avoid certain ESG risks.
Why is sovereign debt bad?
High sovereign debt levels are associated with slower economic growth and rising default risk. Government borrowers able to issue bonds in their own country's currency are less likely to default.
Types of Sovereign Debt
Bonds issued by developed economies, such as Germany, Switzerland, or Canada, usually carry very high credit ratings. 12 They are considered extremely safe and offer relatively low yields.
The firms' strong support of ESG investing in recent years has led some financial advisory firms and a segment of the public to question whether financial institutions should concentrate on financial performance rather than other considerations. BlackRock and Vanguard have a reputation for backing ESG initiatives.
Mandatory ESG reporting in the US
There are currently no mandatory ESG disclosure requirements on the federal level in the US.
Comparing the MSCI USA Extended ESG Select Index to the S&P 500 Index, the MSCI USA Extended ESG Select Index outperformed the S&P 500 Index in all but one of the last seven years. In 2022, the S&P 500 declined by 19.44%, while the MSCI USA Extended ESG Select Index declined by 21.12%.
89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.
Environmental, social, and governance (ESG) factors have become increasingly important in the banking sector. Regulators are implementing more requirements, investors are demanding concrete returns, and both corporate and retail customers are seeking diverse offerings.
ESG frameworks are important to sustainable investing because they can help individuals or other corporations determine whether the company is in alignment with their values, as well as analyse the ultimate worth of a company for their purposes.
Results indicate that bond credit spreads are lower for listed companies with higher ESG performance. Good ESG performance decreases bond credit spreads by decreasing corporate financial risk, enhancing corporate transparency, and decreasing debt agency costs.
The SEC is currently utilizing antifraud, reporting, and internal controls provisions of the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act), as well as various related rules, to bring ESG-related enforcement actions.
What is the biggest ESG scandal?
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
In less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management.
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
Much of the backlash has been focused on the “E” in ESG, and in particular the incorporation of climate change considerations into investment decisions—though some social issues, especially company efforts to address anti-LGBTQ+ and specifically anti-transgender bias, have come under attack.
Coupled with the fact that ESG ratings are primarily self-reported, this pattern has given rise to a system where companies can superficially endorse sustainable practices, indulging in what is known as greenwashing, without having to demonstrate concrete results or genuine commitment to environmental responsibility.