Russia isn’t the only hard currency issuer with a precarious risk profile.
On Thursday, global risk intelligence firm Verisk Maplecroft is expected to publish an analysis of its sovereign environmental, social, and governance ratings, which measure and track the ESG risks for government debt issuers. Authors Eileen Gavin, principal analyst of global markets and Americas, and James Lockhart Smith, vice president of markets, found that while the war between Russia and Ukraine posed ESG challenges for emerging and frontier market government bondholders, 15 countries touted even worse ESG profiles than Russia.
Turkey, Egypt, Peru, Nigeria, Angola, Iraq, Pakistan, and Ethiopia were among the countries with worse ESG scores, according to the report.
“It’s flagging potential risk for investors holding those bonds moving forward,” Gavin told Institutional Investor.
The dataset included ratings for 198 countries dating back to 2017. The ESG ratings provided to each country assessed issuers across environmental risks like natural capital endowment and protections, natural capital degradation, physical risk, and transition risk; social risks including health, education, resource security, human rights, and labor risks; and governance risks, which encompass the strength of the country’s institutions and its sources of instability.
“Russia and China are not the only problem in town,” the report said. While both countries have problematic ESG scores, other heavily-traded nations like Turkey and Egypt show even worse ESG stories, according to Verisk Maplecroft.
For example, Turkey has a governance score of 1 out of 100, which is the “worst of any investable market except Ethiopia,” according to the intelligence firm. With political risks, a corrupt institutional environment, and a weakened democracy, the country poses major ESG risks for bondholders. Gavin said the country’s geopolitical proximity to Russia also weakens its ESG score.
“Given the current situation with the Russian-Ukrainian war, [Turkey is] vulnerable,” she said.
For bondholders, sovereigns with low ESG scores are a major risk heading into 2022’s “macro storm,” the report said. Verisk Maplecroft argued that without strong ESG fundamentals, countries like Turkey will experience continued decline.
The authors also warned that the combination of weak ESG trends and deep macro pressures will hit certain markets like Indonesia, the Philippines, and Peru hard.