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Integrating ESG in Euro Government Bond portfolios

Integrating ESG in Euro Government Bond portfolios

07-07-2014 | Insight

The ESG ranking of a number of euro periphery countries has improved, after having reached a low in 2010. These changes give information on developments in a country’s investment risk. We use this information to identify trends in, for instance, the political climate that are relevant for our investment decisions.

  • Olaf  Penninga
    Olaf
    Penninga
    Senior portfolio manager fixed income
  • Rikkert  Scholten
    Rikkert
    Scholten
    Portfolio manager fixed income, sustainable investing
  • Both ESG profiles and changes in profiles give relevant information 
  • Clear relationship between Country Sustainability Ranking and positions in euro government bonds

Changes in ranking are relevant for our investment stance Changes in the scores and in the ranking show whether a country is improving or not. By taking changes in the ranking into account we acknowledge the efforts to improve in the fields of E, S and G, although the effects may only be visible after some time has passed. After all, reforms require effort and often hurt some vested interests before bearing fruit. By investing in these countries instead of avoiding them, investors support the reform process and can profit from investing in countries that aim to improve, rather than wait until the improvements have lifted the country to the level where it is ‘best in class’. A somewhat lower, but still acceptable ranking means that change –and support for change- is necessary. Whether or not those changes are happening will impact our investment stance. 

Furthermore, from an investment viewpoint we believe that opportunities exist where improvements are being made. If a country has already reached a high score this suggest that a country can have safe haven qualities in times of unrest – next to ‘traditional’ aspects like a low government debt and solid current account. This is indeed what we have seen during the euro crisis in countries like Germany, or Austria, but also outside the euro area in the Scandinavian countries.

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