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ESG: why lack of country data is problematic for bondholders

ESGGovernment bonds make up much of the fixed income universe, but this is a problem for bondholders as environmental, social and governance (ESG) factors for countries are less developed than for corporates.

According to NN Investment Partner’s head of fixed income and responsible investing, Edith Siermann, ESG data on countries is often outdated.

“To close this gap, we need better ESG data on countries, as this is often outdated or lagging. In addition, investors across all asset classes have significant and often justified concerns about greenwashing and a lack of transparency,” she tells Funds Europe.

Improved data usage can lead to a better risk-return profile in investment portfolios and ultimately contribute to a more sustainable financial system, she says.

Like Siermann, index provider MSCI’s vice-president, fixed income and ESG research, Kevin Kwok, believes there is the need for better information.

In high yield and emerging markets, he says, the proportion of small-cap and private companies is higher. Often regulations are more lax and disclosures are at a bare minimum, so analysts must rely on the bond prospectus and alternative data to fill any gaps.

Understanding that key issues differ from industry to industry is also crucial, says Kwok. “We identify about six to ten key ESG issues where companies in that industry currently generate large environmental or social externalities; these are issues where some companies may be forced to internalise unanticipated costs associated with those externalities in the future.”

*Fixed income has historically lagged equities in the ESG field. Find out what the main challenges are for ESG bondholders and how they aim to overcome them here.

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