In January 2013 AXA Investment Managers published a report entitled, “Sovereign Debt Investing: ESG Framework and Applications.” The report by Lise Moret, Senior Quantitative Analyst, and Pascale Sagnier, Head of ESG Thematic Research, is part of the series ESG Insight.
According to the executive summary, the report presents “two ways that investors may incorporate ESG factors into a sovereign debt portfolio using a new country ESG analysis framework.” One methodology – mitigating reputational risk – involves using negative screening to exclude certain countries from the investment universe due to their poor or under-performance on ESG criteria. A second methodology – ESG overlay – involves applying to an existing portfolio an “ESG overlay that over- or under-weight(s) each country based on its ESG score relative to market classification – either developed or emerging market – in order to build an ESG-tilted portfolio.”
The following ESG criteria are employed:
- Environmental – CO2 emissions;
- Social – United Nations Human Development Index data set;
- Governance – World Bank Governance Index; and
- Political Commitment – a country’s signatory status and ratification of 21 international conventions covering a range of ESG issues.
The report includes a case study of reputation risk in emerging markets and a graph charting declining governance performance in Venezuela since 1998.
You may download the report on the Responsible Investment page of the AXA Investment Managers internet site.