Sovereign Environmental, Social, and Governance (ESG) Investing: Chasing Elusive Sustainability

Abstract

This paper evaluates the progression of the sovereign ESG landscape since the initial comprehensive assessment of the sector in 2021 in “Demystifying Sovereign ESG” by conducting a comparative analysis of the current sovereign ESG methodologies of commercial ESG providers. The 2021 study articulated the distinct nature of the sovereign ESG segment from corporate ESG and documented fundamental shortcomings in sovereign ESG methodologies, such as the “ingrained income bias”, lack of consensus on environmental performance, and conflation of risk and sustainability objectives. While sovereign ESG methodologies have evolved since 2021, the significant correlation across providers of aggregate, S, and G scores persist. In response to market demand there has been a notable shift towards greater focus on the E pillar against growing heterogeneity on climate and environmental considerations across ESG providers. The findings underscore the disparity between perceptions and realities in implementing a sustainability strategy within the sovereign debt asset class. This necessitates a reevaluation of sovereign ESG scoring methodologies towards outcome-based metrics and urges a globally coordinated effort to establish robust sustainability measurement frameworks.

Keywords: ESG, sovereign debt, sovereign ESG scores, sustainability, environmental and climate sustainability, climate financial architecture, ESG provider, ESG methodology, sovereign Environmental, Social, and Governance, ESG landscape, ESG score, Corporate social responsibility, Environmental sustainability, Income, Climate finance, Global, Middle East

JEL Classification: M14, G23, G24, Q56, E25, H63, Q50