Engagement is integral to responsible investment in all asset classes, and for sovereign bondholders this should not be an exception. Bondholders engage to make more informed investment decisions. Indeed, many already regularly engage with government representatives and other country authorities to gain insight, primarily around fiscal and monetary policies, both key for pricing bonds.
The report ESG ENGAGEMENT FOR SOVEREIGN DEBT INVESTORS published recently by the Principles for Responsible Investment (PRI) explores environmental, social, and governance (ESG) issues engagement in sovereign debt investing, including current market practices, challenges and differences between corporate and sovereign bondholder engagement, and the role it can play in promoting responsible investment.
Sovereigns bondholders should be more active in engaging with nations on ESG issues to affect change, according to the report. Engagement in any asset class allows investors to move from merely observing an issuer’s ESG performance and historical trajectory to encouraging an improvement in transparency and tangible actions in relevant areas, thus using their weight to influence and shape ESG outcomes. Both the investee entities and their investors are consequently better informed to address ESG factors that might be material to the pricing and performance of their securities.
Sovereign bondholder engagement differs – not only from shareholder engagement, but also corporate bondholder engagement. As responsible investment expectations evolve beyond pure risk-return considerations to shaping sustainable outcomes, so will capital allocation and engagement practices.Through their contribution to countries’ funding needs, sovereign bondholders can help accelerate progress towards sustainability goals, and cease being an underutilised resource.
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