ESG investing in EM debt: enhancing sustainable development outcomes

Inherent challenges in EM ESG analysis

Today’s financial markets are at an extraordinary juncture, grappling with persistently high inflation, war in Eastern Europe, global climate change and the ongoing and severe effects of the COVID-19 pandemic. Against this backdrop, fixed income investors are increasingly seeking to generate financial returns while building portfolios that support positive outcomes through environmental, social, and governance (ESG) investing.

In an emerging markets (EM) sovereign debt context, Nuveen’s focus is on enhancing sustainable economic, environmental, and human development outcomes, which we believe are highly correlated with material ESG factors. But executing on an EM ESG strategy is no easy feat. Research shows that existing third-party ESG frameworks generally fall short when it comes to accounting for countries’ differing starting points on the journey of economic development, leading to inherent income biases.1 The significant diversity within EM requires a highly refined approach to assess the ESG performance — and potential — of each country.

Drawing on Nuveen’s decades of experience investing in EM debt and longstanding leadership in fixed income responsible investing, we developed a proprietary EM ESG scoring framework that addresses the shortcomings of third-party approaches. Our framework adjusts for each country’s specific level of economic development, while ensuring that governance remains the cornerstone of every assessment. Furthermore, we address both environmental risks and related social consequences, recognizing the conflicts that can arise between the two when moving rapidly on climate change.

Most third-party ESG frameworks were created primarily for public equities in developed markets, making them ill-equipped to address the elements that make emerging economies unique. The complexity of sovereign issuers only adds to the challenge of ESG assessment.