State Steet Global Advisors is one the largest managers of Emerging Market Debt globally with over $33bn in assets under management as the end of September 2022. As investors look for ways to apply ESG to EM Sovereign Debt, Lyubka Dushanova, EMD Portfolio Strategist, addresses the key questions we hear from clients and highlights some of the challenges and opportunities that investors face in this area.
ESG is an increasingly important consideration for investors. According to the latest survey conducted by State Street Global Advisors — The Future State of Fixed Income — ESG tops investors’ agendas as they seek to apply it to all corners of the fixed income investment universe, including EM sovereign debt.1 There are various ways in which an ESG framework can be applied to EM sovereign debt:
Best-in-Class Approaches Optimization or rules-based approaches that are based on internally-produced or third-party ESG scores.
Screening This may be both positive and negative. An example of negative screening is the exclusion of a sovereign issuer for failing to achieve a specified civil and political rights score based on the Freedom House Index. An example of positive screening is the deliberate inclusion of green-labelled bonds.
Thematic Approaches Investing in themes or assets specifically aimed at solving social or environmental problems (e.g. align portfolios with the transition to a low carbon economy and a reduction in global warming to well below 2°C).
Impact Investing These typically target measurable positive social or environmental impacts. Investments are generally project specific.
Investors can use these approaches individually or as a combination. They can be applied either by adopting an off-the-shelf ESG benchmark or through a customized solution that can be applied on the portfolio or index level through a bespoke benchmark.