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Emerging Perspectives

Can sovereign debt investors help save the planet?

17 July 2019
Authors: Peter EerdmansHead of Fixed Income and Co-Head of EM Sovereign & FX, Mike HugmanPortfolio Manager

Key points

  1. The degradation of nature threatens national economies and the systems that underpin human society globally.
  2. Understanding environmental risks is therefore key to profiling a country’s economic prospects and its ability to repay debt.
  3. Analysis of geo-spatial data and satellite imagery will increasingly allow sovereign debt investors to obtain more accurate and timely assessments of environmental change.
  4. This will enhance investors’ ability to evaluate and monitor environmental risks. It will also facilitate their engagements with sovereign issuers and encourage the adoption of long-term fiscal agendas that serve people and the planet.

 

Despite the importance of natural capital to a nation’s economic sustainability, until recently investors have generally paid scant attention to the connection between environmental factors and the long-term risk/return profile of debt issued by sovereign entities. In contrast, social and governance factors have been widely considered.

Current models to assess the risks associated with sovereign debt investments typically do not comprehensively integrate environmental issues, often relying on broad proxy indicators that may mask the complex nature of the environmental threats facing countries.

WWF and Investec Asset Management recently joined forces to assess the potential uses of geo-spatial research — both to measure environmental risk in sovereign debt portfolios and to facilitate engagement with governments to encourage fiscal agendas that serve people and the planet.

Spatial data can help investors conduct more robust, comprehensive and credible analysis of the systemic environmental risks facing sovereign bond issuers. And the quality of spatial data is improving rapidly, offering investors new research possibilities and enabling them to have greater confidence in their analysis.

With the world facing a looming climate and biodiversity crisis, new research techniques could transform investors’ ability to evaluate environmental risks. And for sovereign debt investors, they provide valuable opportunities to assess such risks at the country level.

By addressing environmental risks more fully and engaging constructively with issuers, sovereign debt investors can play a meaningful role in encouraging more responsible stewardship of the Earth’s natural capital.

Read the paper

Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Peter Eerdmans
Peter Eerdmans Head of Fixed Income and Co-Head of EM Sovereign & FX
Mike Hugman
Mike Hugman Portfolio Manager

Important information:

This material is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual results may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, issued July 2019.

The content of this page is intended for investment professionals only and should not be relied upon by anyone else

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