Giving Credit Where It’s Due: ESG Factors in EM Sovereign Debt (Lazard Asset Management)

Emerging markets investors are increasingly focused on environmental, social, and governance (ESG) considerations

when making investment decisions. Several studies, as well as demonstrated market behavior, show a clear correlation between a country’s bond performance and the strength of its institutions and governance.

In this paper, we verify this relationship and go further to quantify the impact of ESG factors on a country’s credit spread. By disaggregating our spread forecast for each emerging markets country, we are able to estimate the portion of the spread attributable to ESG considerations. These findings have compelled our emerging markets debt team to modify its investment analysis to include a broader set of ESG indicators. The team has also introduced a new methodology that allows for better differentiation between countries with similar ESG profiles for more precise sovereign credit analysis. READ MORE