Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing

This study, “Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing" demonstrates that implementation choices regarding how ESG constraints ar ...

Author(s):

Lionel Martellini

EDHEC-Risk Institute

Lou-Salomé Vallée

This study, “Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing" demonstrates that implementation choices regarding how ESG constraints are incorporated in the context of sovereign bond portfolio construction have a material impact on this opportunity cost. In particular, we find that higher environmental scores for developed countries and higher social scores for emerging countries are associated with lower costs of borrowing for issuers and consequently with lower yields for investors. We also confirm that negative screening leads to more diversified portfolios and lower levels of tracking error, while positive screening leads to higher levels of improvement of ESG scores, at the cost of an increase in absolute and relative risk budgets. In an attempt to alleviate some of these concerns, we find that a dedicated focus on absolute or relative risk reduction at the selection stage allows investors to reduce the opportunity costs along the dimension that is most important to them. Finally, we provide evidence that ESG momentum strategies in sovereign bond markets can be used to further reduce some of the aforementioned opportunity costs. Overall, our results suggest that sound risk management practices are critically important in allowing investors to incorporate ESG constraints in investment decisions at an acceptable cost in terms of dollar or risk budgets.

Type: EDHEC Publication
Date: le 01/04/2021
Research Cluster : Finance

See Also

EDHEC Augmented Law Institute and Sopra Steria sign a partnership to develop an agility index for legal departments
News
- 27-06-2022
Over the next 3 months, Sopra Steria's legal teams, who benefit from an advanced...
EDHEC ANNOUNCES THE CREATION OF A CENTRE FOR RESPONSIBLE ENTREPRENEURSHIP
News
- 27-06-2022
EDHEC Business School announced the creation of its Centre for Responsible...
The Economist ranks EDHEC Global MBA among Top 20 worldwide, #4 in Europe
News
- 22-06-2022
The EDHEC Global MBA ranks among the Top 20 best MBAs worldwide and #4 in Europe,...
EDHEC Master’s programs: new exchange opportunities
News
- 22-06-2022
EDHEC is extending its range of academic partnerships in Europe and North America for...