IMF Working Papers

Do ESG Considerations Matter for Emerging Market Sovereign Spreads?

By Carmen L Avila-Yiptong, Mahamoud Islam, Ayah Said, Chima Simpson-Bell

April 11, 2025

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Format: Chicago

Carmen L Avila-Yiptong, Mahamoud Islam, Ayah Said, and Chima Simpson-Bell. "Do ESG Considerations Matter for Emerging Market Sovereign Spreads?", IMF Working Papers 2025, 073 (2025), accessed May 22, 2025, https://doi.org/10.5089/9798229005654.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper aims to investigate the determinants of sovereign spreads for a panel of 79 emerging markets and development economies (EMDEs) over the period 2001-2021, with a particular focus on the role of Environmental, Social, and Governance (ESG) factors. Using panel fixed-effect regressions, our results show that improvements in ESG factors tend to reduce sovereign spreads, alongside domestic variables capturing growth, fiscal and external balances, and global factors such as U.S. interest rates and changes in global risk sentiment. In particular, we find that governance is a key factor in explaining movements in sovereign spreads, including perceptions of government effectiveness, regulatory quality, and the control of corruption. Social and environmental aspects, proxied by population purchasing power and greenhouse gas emissions, respectively, also play significant roles. Our contribution to the literature is threefold: first, we confirm the results of previous papers on the relevance of ESG in explaining emerging market spread movements; second, we delve deeper by unpacking the elements that matter most within ESG factors; and third, we construct an aggregate ESG indicator using principal components analysis to summarize its overall impact.

Subject: Climate change, Corporate social responsibility, Economic sectors, Emerging and frontier financial markets, Environment, Financial markets, Greenhouse gas emissions, Public debt

Keywords: Aggregate ESG indicator, Climate change, Corporate social responsibility, Emerging and frontier financial markets, Emerging markets, ESG, ESG consideration, ESG factor, ESG index, ESG variable, Global, Greenhouse gas emissions, Sovereign spreads

Publication Details

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