A top-performing emerging-market bond fund is avoiding investments in Russia, China and Saudi Arabia as the three countries score too low in its ratings for environmental, social and governance risks.
The $1.5 billion Candriam SRI Bond Emerging Markets Fund has outperformed almost 90% of peers in the past three years and screens for ESG factors. The bottom 25% of countries on the fund’s ranking get blacklisted, no matter how big a role they play in the bond world.
This approach could be a harbinger of the challenges facing developing-nation governments that rely on foreign capital. At the moment sovereign borrowing costs don’t typically take into account factors such as commitment to cutting carbon emissions or reducing corruption, but they might in the future.
“ESG investing is gaining pace in the emerging-market debt space,” Magda Branet, deputy head of emerging-market debt at Candriam, said in an emailed response to questions. “Clearly investors will increasingly look to be compensated for ESG-related risks. They will demand higher risk premia from countries that score poorly in their criteria, or avoid some issuers altogether.”
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