July 12, 2022

Dealing with income bias in sovereign ESG scores - Sovereign ESG revisited

Investors are embracing sustainable investment strategies in passive fixed income like never before. Billions of dollars are flowing into ESG-tilted sovereign debt as asset owners try to mitigate their exposure to climate risks. But there are unintended consequences that are not discussed enough, notably related to biases present in the ESG assessment where scores tend to favour higher income countries.

In this paper we propose an ex-post way to deal with income bias in Sovereign ESG. Using a simple statistical framework and our proprietary Sovereign Risk Monitor (SRM) methodology, we estimate a log-linear relationship between the income level of economies and their respective Economic, Social and Governance performance assessment.