Do ESG Considerations Matter for Emerging Market Sovereign Spreads?
IMF Working Papers, April 11, 2025
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Bibliographic details
- Authors: Carmen L Avila-Yiptong, Mahamoud Islam, Ayah Said, Chima Simpson-Bell
- Published: April 11, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229005654.001
Summary
- Objective: Investigate 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.
- Main empirical approach: Panel fixed-effect regressions.
- Core finding: 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.
Key empirical findings
- Governance is a key factor in explaining movements in sovereign spreads, including:
- perceptions of government effectiveness,
- regulatory quality,
- control of corruption.
- Social and environmental aspects also play significant roles:
- Social proxy: population purchasing power.
- Environmental proxy: greenhouse gas emissions.
- Global and domestic controls found relevant:
- Domestic: growth, fiscal balances, external balances.
- Global: U.S. interest rates, changes in global risk sentiment.
Methodology highlights
- Sample: 79 emerging markets and development economies (EMDEs).
- Sample period: 2001-2021.
- Estimation technique: panel fixed-effect regressions.
- Constructed an aggregate ESG indicator using principal components analysis to summarize overall ESG impact.
Contributions to the literature (threefold)
- Confirms results of previous papers on the relevance of ESG in explaining emerging market spread movements.
- Unpacks elements within ESG to identify which components matter most for sovereign spreads.
- Constructs an aggregate ESG indicator using principal components analysis to summarize its overall impact.
Subjects and keywords
- Subject tags: 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.
Content in this bundle
- Working Paper