Top-performing fund avoids investments in emerging markets low on ESG score

Candriam’s model evaluates how countries access and deploy natural, human, social and economic capital
A top-performing emerging-market bond fund is avoiding investments in Russia, China, and Saudi Arabia as the three countries score too low in its ratings for environmental, social, and governance risks.

The $1.5-billion Candriam SRI Bond Emerging Markets Fund has outperformed almost 90 per cent of peers in the past three years and screens for ESG factors. The bottom 25 per cent of countries on the fund’s ranking get blacklisted, no matter how big a role they play in the bond world.

This approach could be a harbinger of the challenges facing developing nations  that rely on foreign capital. At the moment sovereign borrowing costs don’t typically take into account factors such as commitment to cutting carbon emissions or reducing corruption, but they might in the future.

“ESG investing is gaining pace in the emerging-market debt space,” Magda Branet, deputy head of emerging-market debt at Candriam, said in an emailed response to questions. “Clearly investors will increasingly look to be compensated for ESG-related risks. They will demand higher risk premia from countries that score poorly in their criteria, or avoid some issuers altogether.”

Candriam’s model evaluates how countries access and deploy natural, human, social and economic capital. Regimes deemed to be non-democratic or repressive are stripped out, along with those with a credit rating lower than B-, or six levels below investment grade. The fund’s biggest country holdings are Mexico, Indonesia and Chile.

Currently the model excludes 33 emerging markets, or about 40 per cent of the JPMorgan EMBI Global Diversified Index, considered the benchmark for most emerging-market sovereign bond funds, Branet said during a webinar earlier this month. The model is reviewed regularly, allowing poorly-rated countries the chance to move onto the investment list if they improve. 

There’s currently no industry-wide standard for applying ESG to sovereign debt, leaving most fund managers who want to incorporate it reliant on internal analysis. Very few funds exclude major emerging markets due to low scores.

“Greenwashing” practices such as misusing ESG ratings are making it difficult for regulators to protect investors, though policy makers are starting to work together to address this, according to Christine Kung, head of sustainable finance at Hong Kong’s Securities and Futures Commission.

Bram Bos, a lead portfolio manager at NN Investment Partners BV, says investor demands are changing and it’s possible that ESG will begin to have an impact on borrowing costs. Governments and companies selling green and social bonds -- where issuance has hit record highs this year — are already starting to see that pay off.

“In the past, there was a roadshow when a government issued a bond and it was all about macro-economic fundamentals,” said Bos, whose firm manages  €287 billion  ($336 billion). “Nowadays, with green and social bonds, other topics are also being discussed and that gives investors another tool to press governments.”





Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel