How to Avoid the Next Sovereign Debt Crisis

Applying environmental, social, and governance (ESG) criteria to government bonds can help investors steer clear of the most indebted nations, according to Standard & Poor’s Dow Jones Indices (S&P DJI).

“Incorporating ESG country risk metrics can help to better understand and potentially reduce risk in sovereign bond portfolios.”In a report co-written by staff from S&P DJI and fund manager Robeco, the authors used more than 250 data points to establish 17 “indicators” for rating government bonds.

“Incorporating ESG country risk metrics can help to better understand and potentially reduce risk in sovereign bond portfolios,” the authors wrote.

Sustainability “is an important element of a country’s long-term risk profile,” they added. Among the criteria examined by Robeco to establish the ESG “scores” were a country’s reliance on energy imports, renewable energy generation, economic competitiveness, political risk, life expectancy, and per capita income.

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Traditional fixed-income indices that weight exposure by the volume of market issuance can “indirectly imply higher risk,” the report said.

“During the European debt crisis of 2009, the investors in these indices were overexposed to highly indebted countries, such as Greece or Italy, which led to a higher volatility of returns,” the authors wrote.

Greece’s weighting in S&P DJI’s Pan-Europe Developed Sovereign Bond index declined gradually from just under 5% in May 2008 to zero four years later as it grappled with crippling debt repayments. In the index provider’s recently launched ESG version of the same benchmark, Greece would have remained less than 1% of the index over that period.

The ESG-weighted index also maintains a substantially lower exposure to Italy, a country with the world’s third-highest debt-to-GDP ratio at 132%. UK government bonds make up roughly 30% of the ESG index currently, compared with around 20% of the traditional benchmark.

The full report, “Integrating ESG into Sovereign Bond Portfolios,” can be accessed on S&P DJI’s website.

The head of investments for Lloyds Bank’s pension funds has left the group, Chief Investment Officer has learned.

Simon Lee has overseen investments for the UK bank’s multiple defined benefit (DB) pensions for seven years, since joining from telent in 2008. CIO understands he is to take up a similar role at high street store chain Marks & Spencer’s DB pension, which is known as the Marks & Spencer Pension Trust.

Lee’s departure follows the exit of Larissa Benbow from Lloyds subsidiary Halifax Bank of Scotland’s DB pension earlier this year.

In March, Lloyds Banking Group appointed Momentum Investment Solutions & Consulting as an outsourced CIO (OCIO)—the South African company’s first UK mandate—with Richard Cooper taking on the CIO role for both the Lloyds Bank and HBOS pensions. The funds have combined assets of more than £32 billion ($48 billion).

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A spokesperson for Lloyds Banking Group had not responded to a request for comment at the time of publication. A Marks & Spencer spokesperson had also not responded.