The link between ESG
and sovereign debt
TBLI Conference 2012
Florian Sommer, Senior Strategist, Union Investment
● Sustainability is consistent with our core values as a member of the German
cooperative financial network – our cooperative roots.
● A leading sustainable investment manager with over 20 years experience
and a total of €5.3bn in SRI AuM.
● A partner for sustainable investment solutions tailored to client needs
across all main asset classes.
● A differentiated engagement service based on a clear voting approach and
dialogue with companies to ensure shareholder interests.
● A clear commitment to the UN PRI principles.
Union Investment and sustainable investment solutions
2
● In total 83 countries are covered that
account together for 80% of the world‘s
population, and 92% of the world‘s
GDP.
● Each ESG dimension is made up of six
equally weighted issues.
● Only publically available information
from credible sources is being used
e.g. Worldbank, UN, WHO.
The Sustainability Country Rating of Union Investment
3
Source: Union Investment
The ESG dimensions of the Sustainability Rating
4
Sustainability Rating
Environment Social Governance
• Water
• Climate change
• Biodiversity
• Air pollution
• Ecosystems
• Natural disasters
• Rule of law
• Politcal stability
• Democratic rights
• Regulatory quality
• Ease of doing
business
• Corruption
Source: Union Investment
• Health
• Education
• Crime & safety
• Demographics
• Poverty
• Inequality
1st quartile 4th quartile
Norway 94,6 Lebanon 35,7
Sweden 88,7 Sri Lanka 35,1
New Zealand 86,6 Vietnam 34,3
Switzerland 85,6 Jordan 34,1
Australia 84,8 Russia 33,9
Iceland 84,3 Ecuador 32,0
Canada 83,0 South Africa 29,1
Denmark 81,3 China 28,2
Netherlands 81,2 Bosnia 28,1
Luxembourg 80,8 Philippines 27,3
Finland 77,5 Senegal 27,3
Austria 76,7 El Salvador 27,1
France 76,0 Guatemala 26,4
Ireland 75,3 Dominican Rep. 25,5
Germany 71,3 Ukraine 25,4
Singapore 70,6 Jamaica 24,8
United Kingdom 70,1 India 24,4
Japan 69,0 Venezuela 22,6
Slovenia 68,1 Nigeria 21,3
United States 68,1 Pakistan 18,0
Spain 65,9
Global Country Sustainability Rating
5
Source: Union Investment
Top 10%
Second Best 10%
Second Lowest 10%
Bottom 10%
1st quartile 4st quartile
New Zealand 100 El Salvador 34,7
Australia 95,0 China 34,5
Norway 93,0 Sri Lanka 34,0
Denmark 86,7 Philippines 33,3
Iceland 85,7 Trinidad and T. 32,6
Sweden 80,7 Kuwait 31,9
Ireland 80,3 Ghana 31,4
USA 78,9 Lebanon 31,2
Finland 78,3 Egypt 31,2
Netherlands 77,2 Vietnam 30,4
Israel 77,0 Qatar 28,8
Canada 76,0 Morroco 28,4
South Korea 74,6 Turkey 27,3
Belgium 73,9 Dominic. Rep 24,8
Estonia 73,8 Indonesia 24,5
Hungary 72,1 Guatemala 19,2
France 71,9 Nigeria 18,0
Germany 71,1 India 15,5
Greece 68,8 Senegal 14,6
Ukraine 68,7 Pakistan 0,0
Lithuania 68,4
Education index (S)
6
Source: Union Investment, Human Development Index, UNDP, World Bank
Top 10%
Second Best 10%
Second Lowest 10%
Bottom 10%
1st quartile 4st quartile
Finland 100 Serbia 28,1
Sweden 99,7 Vietnam 27,7
New Zealand 99,1 Columbia 27,4
Norway 97,9 Gabon 26,8
Denmark 97,7 Jamaica 26,2
Luxemburg 96,3 Philippines 25,2
Netherlands 94,5 Indonesia 24,5
Canada 94,5 Mexico 24,3
Austria 93,8 Lebanon 22,7
Switzerland 93,5 Peru 22,2
Australia 92,7 Argentina 22,0
Iceland 92,3 Dominic. Rep 20,7
Ireland 92,2 Ukraine 20,4
Great Britain 91,9 Russia 19,4
Germany 89,4 El Salvador 19,2
Singapore 88,6 Pakistan 15,8
USA 85,6 Guatemala 11,2
Malta 85,1 Nigeria 8,7
France 82,1 Ecuador 7,2
Belgium 80,2 Venezuela 0,0
Japan 78,2
Rule of law (G)
7
Source: Union Investment, World Bank
Top10%
Second Best 10%
Second Lowest 10%
Bottom 10%
CDS spreads of Eurozone countries
versus sustainability ratings
Eurozone analysis
8
Source: Bloomberg, Union Investment
CDS Spreads August 2011
Performance Sustainable Portfolio
versus iBoxx 5Y Eurozone
Source: Bloomberg, Union Investment
2. Januar 2004 bis 23. März 2012, Backtest
90
100
110
120
130
140
150
2004 2006 2008 2010 2012
Eurozone Sovereigns 5Y
Portfolio nachhaltig
0
5
10
15
20
25
0 10 20 30
Ran
k C
DS
S
pre
ad
s 2
011
Rank Union Sustainability-Rating 2011
Correlation
coefficient :
0,59
Portugal
Greece
Poland
Sweden
Germany
Netherlands Finland
Irland
Spain Italy
Rumania
Sustainable Portfolio
PRI Sovereign Fixed Income Working Group
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Objective 1:
Understand if ESG issues influence sovereign
creditworthiness.
Investigate how ESG issues can influence
sovereign creditworthiness
Objective 2:
In the context of sovereign debt, understand to
what extent ESG issues are already accounted
for by mainstream investors and credit ratings
agencies.
Working Group Members include:
Union Investment (chair)
Allianz Global Investors
APG Asset Management
ASR Nederland N.V.
AXA Investment Managers Paris
Bank Sarasin & Co. Ltd
Bloomberg L.P.
ECP International S.A.
Danske Bank
Generation Investment Management LLP
Hermes Fund Managers Limited
Maplecroft
MSCI
oekom research AG
Pension Protection Fund
SNS Asset Management
Stichting Philips Pensioenfonds
UNEP Finance Initiative
Unipension Invest
PRI Working Group contact: [email protected]
Framework PRI Sovereign Fixed Income Working Group
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ESG
• Environmental issues
• Social issues
• Governance issues
Factors influencing
creditworthiness
• Economic development
• Government debt burden
and debt maturity
• Budgetary performance
• Foreign liquidity and
balance of trade
• Institutional and political
factors
Financial measures of
creditworthiness
• Credit ratings
• Bond yields and risk
premiums
• Credit Default Spreads
Mainstream Focus
Extended ESG Focus
Source: PRI Working Group
High correlation between sustainability and credit ratings. Is there a causal link?
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Sustainability Rating Union Investment 2011
Germany
Greece
Ireland
Iceland
Japan
Canada
New Zealand
Norway Sweden
Czech Republic
Argentina
China
Georgia
India
Qatar Kuwait
Polen
Ungarn
Uruguay
Vietnam
Equador Pakistan
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
10 20 30 40 50 60 70 80 90 100
UK
Source: S&P, Union Investment August 2011
Correlation
coefficient:
0.76
AAA
AA
A
BBB
BB
B
CCC
CC
S&P
Rating Long Term
Foreign Currency
Rating
2011
South Africa
Russia
Romania
Latvia
Lithuania
USA
High correlation between sustainablity and GDP per capita
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Sustainability Rating Union Investment
GD
P p
er
cap
ita
Australien Belgium
Denmark
Germany
Finland
France
Greece
Israel
Italy
Japan
New Zealand
Netherlands
Norway
Portugal
Sweden
Swiss
Slovakia
Spain
Brazil Chile
Indonesia
Qatar
Croatia
Kuwait
Nigeria
Russia
South Afrika
South Korea
Pakistan
Peru
$0
$10.000
$20.000
$30.000
$40.000
$50.000
$60.000
$70.000
$80.000
$90.000
10 20 30 40 50 60 70 80 90 100
Source: Bloomberg, Union Investment
Correlation
coefficient:
0.79
Why corruption matters as an indicator for downside risk
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Denmark 9,3
New Zealand 9,3
Finland 9,2
Sweden 9,2
Canada 8,9
Netherlands 8,8
Switzerland 8,7
Australia 8,7
Norway 8,6
Ireland 8
Portugal 6
Korea 5,4
Poland 5,3
Hungary 4,7
Czech Republic 4,6
Turkey 4,4
Slovakia 4,3
Italy 3,9
Greece 3,5
Mexico 3,1
Corruption Perception Index 2010
top and bottom 10 of OECD countries
Source: Union Investment, Transparency International (Corruption Perception Index)
Higher probability of fraud in
government statistics
Expansion of shadow economy
Lower ability to collect tax
revenues
Lower trust in government and
lower ability to implement
austerity measures.
Lower attactiveness for foreign
investors
Why corruption matters as an indicator for downside risk
14
Source: Union Investment, Transparency International (Corruption Perception Index)
Korea 35%
Poland 29%
Slovakia 23%
Japan 22%
Belgium 16%
Turkey 16%
Estonia 14%
Ireland 11%
Czech Republic 7%
Australia 5%
Mexico -6%
Portugal -6%
Israel -8%
Finland -8%
United States -9%
Hungary -10%
United Kingdom -13%
Spain -13%
Italy -15%
Greece -29%
Change in Corruption Perception
Index since 2000 in %
Conclusion
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ESG and sovereign creditworthiness
● ESG is valuable for identifiying downside risks.
● Corruption provides an important insight.
Lack of integrated ESG investment research
● Amongst different investment research service groups.
● Important questions for academic research.
Disclaimer
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