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corruption linked to sovereign debt risk

The study – which is based on discussions and presentations by a UNPRI fixed income working group of 33 signatory companies – examines the links between ESG factors, sovereign creditworthiness and investment performance.

Among its key findings is a strong correlation between corruption – as measured by such benchmarks as the World Bank Control of Corruption and Transparency International Corruption Perceptions indices – and subsequent credit ratings.

In addition, research by fund group Union Investment shows that the countries whose sovereign debt yields rose most during the eurozone crisis – namely Greece, Italy, Portugal and Spain – also experienced the largest deteriorations in their Corruption Perception scores between 2007 and 2012.

Looking at ESG more broadly, analysis by Axa Investment Managers and Bank J Safra Sarasin suggests that applying sustainability criteria has a positive effect on investment returns.

For example, the bonds of countries with high ESG scores substantially outperformed those of low-scoring nations between 2009 and 2012, Axa notes.

Other findings include:

  • Countries displaying poor ESG are more prone to shocks from natural, social or economic events;
  • There is little correlation between environmental issues and bond performance; and
  • Credit ratings agencies are perceived as underestimating the importance of corruption to sovereign debt risk.

A PDF of Sovereign Bonds: Spotlight on ESG Risks can be downloaded from the UNPRI website, here.

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