The challenge of integrating ESG into sovereign fixed income

In Short

The Ukraine invasion has abruptly shed light on the difficulties and the limits of the current ESG sovereign framework. Indeed, Russia had on average a good ESG score and was even included in certain ESG indexes before the war. Integrating ESG considerations in managing sovereign bond portfolios is an increasingly important topic for life insurers and more broadly, long-term investors.


  • Sovereign bonds are the largest asset class for life insurers. They are also an essential source of long-term financing for public infrastructure projects. Yet a thorough analysis on how to integrate ESG consideration into investment decisions is lagging relative to equity and corporate credit.
  • The current approach, based on excluding/weighting countries into sovereign bond portfolios given ESG scores averaging several metrics, has been shaken by the war in Ukraine. Russia's relatively high pre-war weight in sustainable indexes and its hasty exclusion highlight inherent problems with ESG scoring.
  • ESG considerations matter more for Emerging Markets (EMs), where performance in terms of sustainability indicators is much more diverse than in Advanced Economies. Crucially, the most widely used ESG scores strongly correlate with per capita income. Therefore, their use for portfolio construction risks hurting the funding of developing countries, which most need financial resources to improve their environmental and social performance.
  • We suggest an innovative approach to address the income bias in ESG scores. We show that a more balanced ESG weighting comes at no cost in terms of performance. We find that the redistribution of investments towards better ESG sovereigns should not penalise total return.
  • Do financial markets care about sustainability? The evidence of pricing climate risk into sovereign spreads is mixed but slightly stronger for EMs. Moreover, bonds issued to fund environmental and social projects enjoy a small premium relative to standard ones.
Core Matters ǀ The challenge of integrating ESG into sovereign fixed income

© Generali Investments, all rights reserved. This website is provided by Generali Investments Holding S.p.A. as the holding company of the main asset management companies of the Generali Group having, directly or indirectly, the majority shareholding in the companies listed below (hereinafter jointly, “Generali Investments”). This website may contain information related to the activity of the following companies: Generali Asset Management S.p.A. Società di gestione del risparmio, Infranity, Sycomore Asset Management, Aperture Investors LLC (including Aperture Investors UK Ltd), Plenisfer Investments S.p.A. Società di gestione del risparmio, Lumyna Investments Limited, Sosteneo S.p.A. Società di gestione del risparmio, Generali Real Estate S.p.A. Società di gestione del risparmio, Conning* and among its subsidiaries Global Evolution Asset Management A/S - including Global Evolution USA, LLC and Global Evolution Fund Management Singapore Pte. Ltd - Octagon Credit Investors, LLC, Pearlmark Real Estate, LLC as well as Generali Investments CEE. *Includes Conning, Inc., Conning Asset Management Limited, Conning Asia Pacific Limited, Conning Investment Products, Inc., Goodwin Capital Advisers, Inc. (collectively, “Conning”).