Abstract
As environmental, social and governance (ESG) factors become more broadly incorporated into investment decision-making, sovereign fixed income investors are grappling with the best way to benchmark and quantify these factors across a diverse group of countries. While some may use a simple approach of investing in countries with the highest third-party ESG ratings, we disagree. Instead, we think that this “paint-by-numbers” approach is systematically biased against developing countries, where the potential for ESG improvement is arguably greater, and would result in a pool of low yielding, highly correlated, and geographically concentrated countries. Morgan Stanley Investment Management has developed what we consider to be a better approach.
Co-author: Jim Caron
