What metrics to use when considering ESG factors within Sovereign Debt

What metrics to use when considering ESG factors within Sovereign Debt

Investing in sovereign debt can create opportunities for many across nations. Using an ESG investing lens to these can help find the right investments that align with your client's values.

Jack Casady

June 23, 2022
Image created by Dall-E, using a few of our new metrics as the image source

We’ve recently added the ability to review sovereign bonds within YourStake. Our users now have access to country performance on ESG issues. Learn about a few of the new metrics you’ll see, and how you can use them to evaluate your portfolios.

Investigating global indices and metrics in regards to social issues

The Country Women Peace and Security Index measures inclusion, justice, and security for women globally. This is a helpful index to understand how different projects across the globe can benefit all people of a country or exclude others. Pakistan, for instance, is one of the lowest-rated in the index due to the lack of women’s inclusion across the country in issues such as schooling, employment, sexual assault, and legal representation. Norway is the top-rated country for this metric. When evaluating the potential impact of sovereign bonds focused on economic development, community programs, and safe transportation, this index can help investors understand the likely distribution of proceeds towards efforts that benefit women.

Investing in a sustainable environment for lasting generations

Climate change continues to cause devastating weather events, disastrous flooding, and significant changes to our atmosphere. 

If countries invest and adopt the right policies, they continue to economically grow while limiting or reducing their greenhouse gas emissions. To find out which countries are championing sustainability, we can look at metrics such as CO2 intensity. 

For example, Switzerland has built dams to generate the majority of its electricity and supplemented that with nuclear power and a robust public transit system to have one of the lowest carbon intensities in the world. By contrast, Mongolia produces the majority of its electricity from coal and has become a top coal exporter for many of the highest energy intensity countries in the world. However, this trend does not need to dictate the future.

We also make the “Country CO2e Projections for 2030” available from Climate Action Tracker, which calculates global warming consequences and emissions. Though their calculations help provide powerful insights on what change we can make, it also takes public support for many generations to help champion change and policies to make the necessary changes to create a sustainable future. 

Greta Thunberg was so concerned about climate change, that she decided to skip school every Friday and protest in front of the Swedish parliament. Now, her organization, Friday for Future, reports on how many are following in her footsteps to protest for stronger climate action, which we include in our Country Climate Strike Participation metric. This can be a strong indicator of future climate action.

How Bonds can create a healthier country 

Tracking a country's overall health can be difficult because wealthier countries have more money to spend on healthcare. However, we provide some metrics that are tied to health and are less directly tied to wealth. From the World Happiness Index, we allow you to track the happiness of countries in your portfolio. While the source of true happiness may be hard to know, some say Finland’s secret is the sauna for a top rank in happiness. 

We also have data on a country's prevention of Covid-19 deaths. While, unsurprisingly, island countries like Barbados, New Zealand, and Australia, excelled at reducing death rates during the height of the Covid-19 pandemic, we also saw that China’s zero-tolerance Covid-19 lockdowns also led to fewer deaths. 

Human Rights and Equality

YourStake’s new Country Freedom of Expression and Country Human Rights metrics could actually help provide some insight into the layered complexities that lead to a country's rating on lower Covid-19 deaths. For our Country Freedom of Expression metrics, we utilize Freedom House’s database of combined media, religious, academic, and personal expression rights in our countries covered. This measures issues of democracy, and internet freedom, which can aid in understanding if a country offers universal human rights to its citizens and equal access to truthful information and resources. In the Country Human Rights metric, we use the Global State of Democracy Report from the International Institute for Democracy and Electoral Assistance. This report helps frame issues that were made worse by the pandemic such as persistent inequalities, growing disinformation being spread, and the undermining of media integrity.

For people to live well, it may take a bit more than freedom of expression. Gaping inequalities can prevent people from even satisfying their basic needs even if the country has the wealth. We give you the Gini Index to measure how deep the inequalities are. To mark off those countries which are really bad, we have a binary metric for Country Welfare and Equality.

Sovereign Bond Alignment with SFDR

The Sustainable Finance Disclosure Regulations (SFDR) is a set of rules and regulations for ESG investment products in the European Union. This policy created a taxonomy for ESG products as well as indicators for what should be measured and tracked as components of ESG investment. Specifically for Sovereign debt, two mandatory data points must be tracked for all, GHG intensity of investee countries and the number of investee countries subject to social violations as referred to in international treaties, conventions, United Nations principles, and where applicable, national law.

 These indicators are listed below along with the metrics we built to track this requirement.

*Denotes that these are mandatory by SFDR

Non-SFDR metrics currently available from YourStake: Country Happiness, Country Climate Strike Participation, Country Projected 2030 CO2e Intensity, Country Women Peace and Security Index, Country Excess Deaths from Covid, Climate Climate Strike Participation

Finding the right Sovereign Bonds for your client

Though these are just a few examples of how ESG factors play into sovereign bonds, we offer the ability to align your clients' values or your advisory values into our tool to find the right bonds for your desired impact.

Build your own sovereign bond Impact Report to gain valuable investment insights and invest where you’re looking to create meaningful impact.

A screenshot of our report for sovereign bonds

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