How can bond investors fairly score countries for ESG?

Marcus Jennings

James Ringer

Karen Wright

It’s challenging for bond investors to score sovereigns on their environmental, social and governance (ESG) performance, often leading to a bias towards richer countries. But the Schroders fixed income team has developed a framework that gives countries a more level playing field.

Marcus Jennings - Sustainability & Macro Strategist, Global Unconstrained Fixed Income, Schroders
James Ringer - Fixed Income Portfolio Manager, Schroders
Karen Wright - Associate Investment Director, Global Unconstrained Fixed Income, Schroders

Although sustainability metrics are increasingly being used in sovereign fixed income markets, there is still no consensus on the appropriate approaches for assessing a country's environmental, social and governance (ESG) performance.

Moreover, there is a noticeable bias in sovereign sustainability scores, which tend to be strongly linked to a country's level of development. As such, addressing this “income bias” in ESG scores remains a key challenge.

As highlighted by the World Bank, this issue is particularly pertinent when constructing investment portfolios based on sovereign ESG scores. Favouring countries with higher ESG scores tilts a portfolio towards richer countries and away from poorer ones, where most investments are needed.

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