The S&P ESG Sovereign Bond Index family offers investors exposure to the same sovereign bonds as standard cap-weighted sovereign bond indices but tilt the country weights towards more sustainable countries, based on RobecoSAM’s Country Sustainability Ranking.
By incorporating country sustainability analysis, the S&P ESG Sovereign Bond Index family seeks to address one of the key challenges associated with standard cap-weighted bond indices: they are overly exposed to highly indebted and therefore risky countries.
Why incorporate ESG factors into sovereign debt analysis?
Country sustainability analysis offers investors insights into a country’s strengths and weaknesses on a broad selection of environmental, social and governance factors. ESG factors such as a country’s access to and management of its natural resources, or a government’s ability to implement economic policies to generate sufficient revenues to service its debt are frequently overlooked by traditional sovereign rating assessments, but have an impact on a country’s economic performance and ultimately, its overall long-term risk profile. In short, incorporating sustainability as a dimension of credit analysis serves as an additional, risk-reducing tool.
Each index in the family uses the underlying S&P Sovereign Bond Index as a starting point and shifts of the country weights depending on each country’s ESG profile. The country’s Sustainability Grade consists of the country’s Sustainability Score from the Country Sustainability Ranking, which is weighted at 75%, and the annual change of the Sustainability Score, which is weighted at 25%. The annual change of the Sustainability Score is incorporated into the Sustainability Grade used to tilt the country weights because countries that demonstrate the ability to improve their ESG risk profile are more likely to attract new investors to their bond markets.
An average Sustainability Grade is calculated for all countries in the underlying S&P Sovereign Bond Index universe. Each country’s Sustainability Grade is then compared to the average grade for the underlying index, and the percentage point deviation from the index is used to determine the weight adjustment. Therefore, all countries with a higher Sustainability Grade than the index average will be overweighted relative to the underlying index, and all countries with a lower Sustainability Grade will be underweighted relative to the index.
Country weights for the S&P ESG Sovereign Bond Index family are determined semi-annually as part of the April and October monthly rebalancing. They are based on the original market value weights of the countries in the underlying index, as of the last business day of March and September, and are tilted to reflect the latest RobecoSAM Country Sustainability Scores. Bonds within each country are market value weighted.
The S&P ESG Pan-Europe Developed Sovereign Bond Index is based on the universe of sovereign bonds issued by countries in the developed Europe region. For each country in the universe, RobecoSAM calculates a country Sustainability Score on a semi-annual basis.