Insight Article Desktop Banner
Sustainable Investing
March 31, 2021

ESG in Sovereign Fixed Income Investing: Identifying Opportunities, Correcting Biases

Insight Video Mobile Banner
March 31, 2021

ESG in Sovereign Fixed Income Investing: Identifying Opportunities, Correcting Biases

Sustainable Investing

ESG in Sovereign Fixed Income Investing: Identifying Opportunities, Correcting Biases

Share Icon

March 31, 2021


In 2019, we published our Morgan Stanley Investment Management (MSIM) Fixed Income “ESG and Sovereign Fixed Income Investing: A Better Way” approach. We highlighted our thesis that countries’ sustainability performance should be evaluated in the context of their stage of development. Our methodology allowed us to avoid the systematic bias against developing countries that typically have lower absolute sustainability performance compared to more developed countries, but may well be outperforming relative to what might be expected given their GDP per capita. In our updated methodology, we introduce further enhancements to our approach, incorporating a broader range of independent Environmental, Social and Governance (ESG) data, a comprehensive assessment of sustainability momentum, flexibility to adapt the approach depending on timeframe, and an impact framework based on the UN Sustainable Development Goals (SDGs).


We introduce our newly enhanced Sovereign Sustainability Model (Display 1), a significantly updated and comprehensive approach to evaluating ESG performance for Sovereign issuers, which is designed to enhance and inform our investment process. Our model integrates the following key elements:

  1. A materiality-based selection of ESG factors, seeking to capture metrics pertaining to a country’s usage of natural resources and climate change vulnerability, human development, the quality of institutions, and rule of law across developed and emerging markets.
  2. Adjustments of our E, S, G scores by GDP per capita to help remove bias against emerging markets. By adjusting against GDP per capita, we believe we can control for wealth and rank of each country based on their expected performance on ESG metrics relative to their income.
  3. Incorporation of a momentum factor that combines our analysts’ qualitative view with a quantitative assessment of track record.
  4. Embedded flexibility to change the weights applied to E, S and G factors, acknowledging that the relative importance of these factors may vary depending on the time horizon of the debt instrument.
  5. Classification of countries in our data set into five categories based on our assessment scale, from “Significant ESG Outperformer” to “Significant ESG Underperformer.”
  6. Adoption of the SDGs as the reference framework for interpreting countries’ progress on economic and social development.
Vice President
Emerging Markets Debt Team
Head of Sustainable Investing
Fixed Income & Liquidity
Vice President
Sustainable Investing Team

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.


This general communication, which is not impartial, is for informational and educational purposes only, not a recommendation. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

Prior to making any investment decision, investors should carefully review the strategy’s / product’s relevant offering document. For the complete content and important disclosures, refer to the link above.


Check the background of our firm and registered representatives on FINRA's BrokerCheck

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.

Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

Subscriptions    •    Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.