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Pricing ESG risk in sovereign credit

Building on our studies showing a strong relationship between the environmental, social and governance performance of companies and their credit spreads, we have partnered with researcher Beyond Ratings to determine whether similar connections exist in the sovereign credit market.

We believe the findings of this paper will give investors a better understanding of the full range of risks that sovereign bonds involve. It has three main objectives:

  • To establish whether there is a relationship between ESG factors and sovereign CDS spreads;

  • If so, to determine which of the three ESG factors have the strongest relationship with sovereign CDS spreads; and

  • To create an implied CDS spread curve that depicts the relationship between country-level ESG scores and sovereign CDS spreads.

This research should help Hermes make better-informed investment decisions and enable Beyond Ratings to improve its sovereign credit assessments.

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